As you settle in for the holiday weekend, we want to take a look back to gain a sense of what's ahead. Summer is upon us, and we’re in for a long hot one. Don’t fret over the “two-steps forward, one and three-quarters steps back” likelihood for a bit. Welcome it instead as a refresher. A fear reset if you will, setting the stage for a surprising upside into 2022 and beyond.
Chop as a Market Constant
We can expect to see more chop, more angst, more nervous periods, more corrections, and more trade ranges ahead. However, there’s nothing new about this. We have been dealing with chop, angst, corrections, recessions, plunges, and trade ranges since the beginning of time. This month, in addition to looking at the next few quarters ahead, we’re also going to take a look back at S&P performance in past decades to understand how we can interpret recent activity.
A couple of things you will note about these "decades":
They all sort of look the same.
They all included several "terrible events", many of which the crowd — and the experts — were certain, all fell under the "Armageddon" category.
Each decade saw the S&P 500 rise (roughly) at an average rate of 300% from start to finish.
The United States, better than any other developed nation on Earth, is entering a 25-30 year period of the strongest and most dynamic demographic forces ever witnessed. Now, scroll back up to those three decades above and remember "300%."
That suggests we end the 2020s around 10,000 to 12,000 in the S&P 500. That further suggests we end the 2030s around 36,000 to 42,000. Don't forget that from January 1980 to the end of the 1990s, we saw the S&P travel from roughly 100 to over 1,400.
The 2020s and 2030s are the 1980s and 1990s all over again — on steroids.
We’re in for Long-term Growth
Total Q2 earnings for the S&P 500 index are currently expected to be up over 61% from the same period last year on revenues which are expected to be 18.0% higher. This follows a 2021 Q1 season which shattered all previous records for growth and margin expansion, with a 49.3% growth rate in earnings YOY and 10.3% increases in revenues over Q1 of 2020.
When combining the magnitude of positive earnings surprises (90+ miss rate by analysts) witnessed in the Q1 reporting cycle and the consistently steady positive revisions to Q2 earnings estimates as the season approaches, we expect the final Q2 earnings growth tally to be significantly higher than the current expected +61.1%.
The full scale of the margin and tech impact will not be seen until we look back from early 2022 and measure all 4 quarters of 2021 in hindsight. Besides, the strong Q2 estimates also reflect sizable organic growth, with total index earnings expected to be up +9.2% from the pre-Covid 2019 Q2 period.
Lastly, let’s not forget the pace of increase as 2021 has unfolded. Estimates for Q2 and beyond have all steadily gone up, with the current +61.1% earnings growth rate up from +50.6% at the end of March and a “paltry” +41.6% expected as 2021 dawned.
Enjoy the summer! Opportunities await for patient and disciplined investors. Schedule time with one of our experts to explore your summer investment strategy.