The U.S. is on track to vaccinate three-fourths of the population by late June, though achieving that number requires overcoming vaccine hesitancy. However, much of the world is further behind, with emerging-market countries on pace to have closer to 30% of their population vaccinated by year end. Regardless, vaccine progress continues and should serve as a strong tailwind through 2021.
Improvement in recent economic data supports optimistic forecasts. Jobs growth is accelerating as states lift restrictions on business activity. Hiring rose in most industries, led by gains in leisure and hospitality, but there were also notable gains in public and private education, most manufacturing sectors, and construction. Estimates are for employers to add more than 6 million jobs for the remainder of this year, marking the best 12-month stretch of job creation in decades.
Another potential boost to growth could come from spending related to an infrastructure plan. Both parties generally agree that infrastructure investment is needed and would be good for productivity, but priorities differ and coming to agreement on the details is far from a given. Infrastructure investment has been a focal point for several recent administrations but the desire to get something done has not been met with much success, highlighting the difficulty in finding common ground.
This brings us to the market itself. Multiples remain elevated relative to historical levels. The S&P 500 is trading at over 22x forward earnings, above the five-year average of just over 18x. According to FactSet, Q1 earnings are expected to grow more than 24%, and in a sign of optimism, analysts have raised their estimates since the end of last year when they anticipated 16% growth in the year’s opening quarter. This is the opposite of the typical Wall Street dance, where earnings expectations are more commonly lowered through the quarter so that companies can clear a lower bar. Full year EPS growth is projected to exceed 26%. Given investor expectations reflected by elevated multiples, it will be up to companies to deliver robust earnings growth.
There remain pockets of froth in the markets. The first quarter featured the GameStop saga, about which there are now reportedly no fewer than nine movies in production, including for both HBO and Netflix. GameStop shares finished the quarter up more than 900% even after dropping more than 50% from peak levels. Bitcoin also nearly doubled in Q1, recently topping $60,000. Special Purpose Acquisition Company (or SPAC) issuance continues apace, and at least 15 companies with no revenue have either already merged this year or plan to merge with a SPAC in coming months at valuations in excess of $1 billion each. These are not things that typically happen in more sober times.
Though it might be fun and even profitable to participate in some of these more speculative areas of the market, a sensible approach for investors in this environment remains the same—invest in a portfolio of growing, quality companies trading at reasonable valuations. This should continue to position investors well for long-term success.
Reprinted from the May 2021 issue of the Investor Advisory Service. For more information, to download a sample issue, or to subscribe to the best investing newsletter in the U.S., visit Investor Advisory Service.