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FREE SAMPLE REPORT – The Equity Market Faces A Growth Risk In The Second Half of 2021 – 5.31.21
Earnings Growth Will Decelerate in the 2H’21 Potentially Leading to A Lower PE Ratio
The second quarter is closing out and will put earnings season into focus. This reporting period is going to be critical. Investors will need strong earnings growth and guidance to support the high multiples present in the S&P 500 index.
Tactical Update – Everything May Have Just Changed
The week ending June 18 turned out to be more consequential than many investors expected. The shock came on Wednesday afternoon when the Fed’s quarterly forecast indicated two rate hikes by the end of 2023. That outlook was lifted from a prior view of no rate hikes through 2023 (Figure 1). While it is inevitable for the Fed to taper their asset purchases and raise rates, nobody expected to see the Fed indicate as many as two rate hikes by the end of 2023.
The Second Half Of 2021 Just Became A Stock Picker’s Market
The week ending June 11 saw the 10-Year bond rate fall by almost 10 basis points (bps), to close at 1.46%. That is well off its highs of nearly 1.78%, last seen at the beginning of April (Figure 1). Despite coming in higher than estimates, the CPI report was not hot enough to push yields up. This sent the 10-year breakeven inflation expectation rate lower by 5 bps to 2.35% and well off its May 17 peak of 2.54%. This pushed stocks tied to the reflation trade lower. It seems possible that inflation has peaked over the short-to-medium term. That is likely to result in rates falling further, thus causing a rotation out of cyclical equities.
Sinking Inflation Expectations May Signal Risk-Off – 6.5.21
Multiple-contraction is now well underway for the S&P 500. The PE ratio for the 18-month forward earnings estimate is at 20.4, down from 21.2 on April 16, despite the S&P 500 being about 1% higher presently. Substantial earnings revisions have helped keep the S&P 500 afloat, with earnings estimates rising by 5.2% from April 16 to $207.47 per share, up from $197.26.
As we enter June, we will quickly be approaching the end of the first half of 2021, and with that, investors are likely to begin turning their attention to 2022. As that happens, investors may quickly learn that equities face more than just interest rate and inflation risk. Growth risk is likely to become an overwhelming issue for equities and as the high earnings growth rate of 2021 moves to a much slower pace in 2022.
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