As of last Friday, 120 companies in the S&P 500 index reported earnings results. The numbers are impressive for this bunch. Altogether, the earnings for these companies moved up over 118% year over year on 18% revenue growth. For the quarter, the total earnings for the S&P 500 index are expected to be over 74% year over year on 20% higher revenues, according to estimates from FactSet. This week, 180 S&P 500 companies will report earnings with the expectation that reported earnings and revenues will come above estimates. These impressive numbers almost take away from the fact that we just got out of a recession. Last Monday, the National Bureau of Economic Research officially declared that the recession caused by the coronavirus lasted two months – the shortest in history. The recession ended the U.S.’ longest economic expansion which spanned from June 2009 to early February 2020, a staggering 128 months.
In 2020, the U.S. economy contracted 3.5%, measured on a year-over-year basis. This was the largest decline experienced since shortly after World War II. With the aid of fiscal stimulus, rollout of Covid-19 vaccinations and continued reopening of the economy, the economy grew at a 6.4% annualized rate in the first quarter of 2021. This Thursday, the commerce department will release 2nd quarter GDP data. Economists are estimating that the economy grew even faster in the second quarter at an 8.5% growth rate, signaling a growth rate of 6.5% for the year, according to a survey by trading economics.
Why does this matter? The economic recovery will be defined by how the labor market recuperates, how much inflation is spurred by consumer spending, and most importantly, how the Federal Reserve will scale back the current monetary policies. If economists’ GDP estimates fall in line with the report released this Thursday, it will likely push GDP above the level reached in the quarter prior to the global shutdown. Still, we should not expect to see such large growth forever.
Economic projections for GDP growth by the Federal Reserve put median estimates for 2021 at 7.0%, 3.3% for 2022, and 2.4% for 2023, with the long-run estimate at 1.8%. Although the figures are decreasing year over year, this does not mean that the U.S. economy will not be expanding. Based on these figures, it appears that we are remaining in a period of growth, albeit at a slower pace. Slow and low growth isn’t necessarily a bad thing, it is still growth. Which begs the question, if the economy continues performing as expected, how soon and how fast will the Fed reduce its assets purchases?
The Fed began buying large quantities of securities last year at the onset of the pandemic in order to bring down interest rates which have the effect of encouraging borrowing and spending. This week Fed officials are expected to continue deliberations into weather the economy is performing as they expected. Still, Fed officials remain divided over the outlook and proper policy, and this division appears to be a characteristic of the uncertainty in the global recovery in developed and emerging countries due to the new COVID-19 variants.
– Jose Rendon