Amid New Record Highs on Wall Street, Experts Predict Even Bigger Boom Ahead

Many experts say the economy is good and getting better. Some have recently amended those statements to become even more bullish.

Pedestrians pass the New York Stock Exchange in February. (AP Photo/Frank Franklin II, File)

MANHATTAN (CN) — U.S. indices posted a fresh round of record highs this week, as many experts have recently changed their economic outlook from good to great.

By the closing bell on Friday, the S&P 500 closed at 4,128 points, gaining about 100 points for the week to set a new record high. Also hitting new peaks were the Dow Jones Industrial Average, which gained about 650 points for the week to settle at 33,802 points, and the Nasdaq, which increased 420 points to hit 13,900.

Most of the week’s gains were driven by another rally in technology stocks, particularly a resurgence in Facebook, Apple, Amazon, Netflix, and Google’s parent company Alphabet. Those stocks saw steep increases in value on Tuesday and Wednesday.

However, the increase in so-called FAANG stocks have lifted most of the boats in the market. John Butters, senior earnings analyst at FactSet, wrote that the S&P 500 has gained up to 28% for the first quarter of 2021, the largest growth seen in more than a decade.

According to a separate analysis by FactSet, the energy sector in the S&P 500 enjoyed, by far, the greatest increase in earnings per share during the first quarter of 2021, gaining 123% of value. The next highest sector, financials, saw only a 13% increase in EPS. Technology stocks on the S&P 500 gained only 9% during the first quarter.

Things are looking up among the financial sector, too. In his annual letter to shareholders, J.P. Morgan Chase CEO Jamie Dimon said the economy is nearly back to fully swing. “I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more [quantitative easing], a new potential infrastructure bill, a successful vaccine, and euphoria around the end of the pandemic, the U.S. economy will likely boom,” he wrote.  

While that seems a long list of ingredients for baking a successful economy, the proof of the pudding is starting to show.

The number of Americans who have received at least one dose of a Covid-19 vaccine continues to increase. Currently more than one-third of the U.S. population have received a dose, according to the Centers for Disease Control and Prevention. More than 66 million, or about one if five Americans, are now fully vaccinated.

Dimon noted that the current boom could run into next year. “The permanent effect of this boom will be fully known only when we see the quality, effectiveness, and sustainability of the infrastructure and other government investments,” he wrote. “Spent wisely, it will create more economic opportunity for everyone.”

Others have also become increasingly bullish on the U.S. economy. The International Monetary Fund on Tuesday raised its U.S. outlook for 2021 to 6.4% growth, up from its previous estimate of 5.1%. The organization predicts the U.S. growth will slow to 3.5% in 2022.

“We are now projecting a stronger recovery in 2021 and 2022 for the global economy compared to our previous forecast,” said Gita Gopinath, director of research at the IMF. “Nonetheless, the outlook presents daunting challenges related to divergences in the speed of recovery both across and within countries and the potential for persistent economic damage from the crisis.”

Persistent scarring is already evident. Unemployment has also started a slight upwards march, hitting 744,000 new initial claims as of the week ending April 3, compared with 728,000 the week before and 658,000 the week of March 21. The claims mark what has become the new normal for certain sectors of the economy, despite a positive jobs report last week by the Labor Department showing 916,000 jobs gained in March.

“It’s very good news for over 900,000 working people and their families, with significant growth across most sectors of the economy indicating that recovery is building momentum,” said Labor Secretary Marty Walsh in a statement last week. “At the same time, over 8 million jobs that existed a year ago are yet to return. Millions of people are still hurting, and we have a long way to go before we are fully recovered.”

Some say the uptick in jobless claims is not something to worry about. “Jobless claims may bounce around week to week as the recovery takes hold, but we expect they will start to decline more consistently as the economy gains momentum,” wrote Nancy Van Houten of Oxford Economics.  “We expect the stellar March jobs report to be the first of many and look for a hiring boom in the spring and summer months.”

Even some of hardest-hit sectors, such as leisure and hospitality, are seeing jobs return gradually. L&H added 280,000 jobs last month, according to the Labor Department report, while retail added far less at only 22,500 jobs.

“Pick out your favorite economically sensitive name from the Industrial, Banking, or Commodity space,” wrote James Vogt of Tower Bridge Advisors in an investor’s note. “Many are significantly higher than pre-Covid levels.”

He noted that Caterpillar was trading at $150 at the end of 2019 but closed around $230 on Friday, adding that while many companies initially hit hard by limited supply chains are now baking in greater demand for construction equipment, mining, and other basic industrials, the fun won’t last forever.

“After distribution chains are repaired in 2021 and commodity supplies get back to normal levels, growth will slow for today’s cyclical leaders,” he wrote. “An infrastructure bill will extend the growth period for many, but that too has a shelf life.”

Unfortunately, a few flies remain in the soup. Inflation – which has become a bugaboo among market bears recently – has jumped to a 10-year high, according to the U.S. Bureau of Labor Statistics, with the producer price index increasing 1% last month. The index now stands at 4.2% for the year, the highest since September 2011.

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