Macro Update

 

Markets have been in a holding pattern for most of April and May, with the exception of the technology heavy NASDAQ index retreating from all-time highs. The drivers that have propelled the markets to all-time highs have not changed: faster strong GDP growth, supportive fiscal and monetary policies as well as healthy household and corporate balance sheets. As these drivers have underpinned the strength in the markets, it also means the markets are now more vulnerable to disappointing economic data or missed expectations.

 

Targets for S&P500 remain unchanged

 

We have a year-end price target for S&P500 at 4,325 which is slightly below average forecast of 4,385 and median of 4,347. This translates into a modest upside in the second half of 2021. The first quarter of 2021’s reporting season has been strong with 86% of the reported companies beating on earnings and 77% beat on sales, however, as the street revise their estimations higher, this sets a higher watermark on beating estimates on a forward basis.

 

The current consensus expectation for 2021 earnings per share for S&P500 is that it will be stronger than its pre-pandemic earnings. The expectation for 2022 earnings per share is also strong.

 

Annual S&P 500 Earnings per Share

Source: RBC US Equity Strategy, S&P Capital IQ/ClariFi, Capital IQ estimates; as of 05/24/2021

 

Markets do not go linearly up or down for a protracted period of time. As previously mentioned, at the current level where markets have already priced in the positive fundamental backdrops anticipated by the reopening, they are now more vulnerable to missing expectations.

 

Since the Financial Crisis, growth scares have been accompanied by drawdowns between 14-20%. However, since then, all of these have represented buying opportunities:

 

S&P Performance With Major Growth Scare Declines

Source: RBC US Equity Strategy, Bloomberg, FactSet, Thomson, as of 04/20/2021

 

What Keeps Us Up At Night?  

 

There are a number of developments which can trigger a correction in the equities markets, I have mentioned a few already such as slower than anticipated economic reopening, higher watermark in beating street expectations, etc., however, these factors should all be relatively transitory and can even represent attractive buying opportunities. The more important drivers are the long term financial and political policy decisions which lead to structural revision in valuation and contraction in financial assets.  

 

The US Federal Reserve

The US equities markets have been growing in tandem with the Federal Reserve’s balance sheet.  Since the great financial crisis and again during the Covid-19 pandemic, the Fed has taken aggressive measures to support the equities markets as well as stabilizing the economy. With such supportive monetary policy in the backdrop, any signs of tapering can trigger real stress in the markets, unless it is balanced by real economic growth. In the long term, real economic growth is the key driver for equity market returns which are supported by real growth in labor, capital and productivity.

 

Federal Reserve Total Assets vs S&P500

Source: RBC US Equity Strategy, Bloomberg, S&P500 as of 05/21/2021

 

 

Rita Li works with individuals and business owners and healthcare professionals to provide tailored investment advice, risk management and financial planning. Her team comprises of professionals with in-depth taxation, insurance and legal expertise, together, they deliver a high standard of service to clients. Rita is a Chartered Financial Analyst CFA® She holds her MBA from Richard Ivey School of Business.