As we find ourselves in the midst of summer, temperatures aren’t the only thing that’s been on the rise. The U.S. economy is red hot this quarter. Many factors have contributed to this: pent-up demand, stimulus money, and easy year-over-year profit comparisons from last year’s lockdown. Additionally, Wall Street expectations on corporate profits for later this year and into 2022 have been ratcheted upwards all year, alluding to higher earnings which are also partly responsible for the rallying stocks that we’re seeing this quarter. The S&P 500 index rose +8.17% from April 1st to June 30th this year, and it’s rallied +92.08% since Covid-19 fears peaked on March 23, 2020.
While this may seem like good news, we have to be vigilant because a red-hot economy could lead to sustained inflationary pressures, which could cause the Fed to become less stock market-friendly with regards to its interest rate policy. Because of this, the bond market has grown more cautious knowing the Fed is now on inflation watch. At the beginning of this second quarter, the yield on a 10-year Treasury bond was +1.69%, by June 30th, the yield has dropped to +1.45%. Witnessing the stock and bond markets out of synch like this leads us to wonder, is the bond market too cautious, or is the stock market too optimistic about the economy?
Looking ahead, our research indicates the positive earnings estimate trends, that have led to higher stock prices, are likely to persist into the second half of the year. We are currently tracking the earnings outlooks rising at a rate even better than last quarter. If this plays out, this could be a positive factor for a fantastic earnings season to provide support for higher stock prices in the next quarter.
Therefore, we want to plan to continue participating in the stock rally, but not be greedy. We will continue to follow this data to help us determine a strategy for when we believe rebalancing back to neutral or cautious levels should get Implemented. Until then, we hope you have a great rest of your summer!
Take a look at our Quarterly Market Review for insights on statistics and trends in domestic and global stock markets.
**All market return data, reference to earnings growth, etc. is all provided by The Earnings Scout, LLC**