2021 1st Quarter Equity Market Update

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We maintain our constructive stance on U.S. equities. While we have seen higher interest rates during the quarter, we continue to believe the positives outweigh the negatives and recently increased our 2021 and 2022 EPS estimate to $190 (from $175) and $225 (from $200) and correspondingly increased our base case price objective to 4,180 (from 4,025) and 4,400 (from 4,200), respectively. The U.S. economy has a lot of momentum as Q4 earnings season finished well above consensus expectations for the third consecutive quarter. Historically, emerging from recessions, earnings have surprised to the upside of consensus expectations and currently we are seeing a similar trend emerge following the pandemic pause. Another area of strength in the US has been the vaccine roll-out, which should help sustain earnings growth higher.

We now have significantly more people vaccinated than have contracted the virus over the last year. This positive trend in vaccines mixed with the declining cases has speed up the trajectory of re-openings, and several states are beginning to relax or remove mitigation measures. Finally, we see the ever important U.S. consumer in good shape with savings rates north of 13% (prior to the most recent direct stimulus payment of $1,400), which should provide plenty of pent up demand in the re-opening.

Despite the best returns in year 1 post-recovery from bear market lows, we would caution that market do not tend to move in straight lines. Year 2 post-recovery does tend to be a little more volatile with the average intra-year drawdown of 12.9% despite the average return of 8.7%. We recommend using those pullbacks as opportunities to accumulate equities.