The S&P 500 has made a series of new highs over the last several weeks. The index is now up over 20% on the year and over 6% in the last two months alone. The strength comes in the face of an economy increasingly burdened by a surging delta variant of covid-19. Though deaths and hospitalizations do not appear to be rising at the pace of new cases, hospital systems are being stretched in regions of the country. With that, there are growing fears around hitting pause on the US reopening. Coupled with another high inflation report, there is more talk of stagflation setting in as we move past the easy comparisons to 2020. Yet, companies are reporting favorable earnings and projecting continued strength into 2022. These earnings reports have been an important catalyst for the market of late.
With the majority of companies reporting, S&P 500 earnings have surprised to the upside by over 17%, and sales have surprised to the upside by over 4.5%. Based on the trajectory of earnings and what the CEOs have said on their calls, earnings growth for the S&P is now projected to come in at 47% for 2021 and 6.6% for 2022. Though a substantial slowdown in growth looms in 2022, a positive growth projection could mean that companies are adding value beyond the reopening. In their own right, companies seem to be continuing to innovate and become more efficient in their processes. Investors appear to have been appreciative of this sentiment over the course of the earnings season.
However, a set of infrastructure bills are working their way through Congress. A smaller bipartisan infrastructure package has been passed by the Senate and is waiting to be taken up by the House. A second and much larger Democratic-led plan is now moving through the budget reconciliation process. Both still face a long path to final approval, but the odds are improving. This means that the potential for an increase in corporate taxes is also on the rise. This could be a threat to the earnings growth that markets are currently baking in and is certainly something we will have to keep an eye on. Early estimates show that tax increases could take roughly $10 off next year's earnings. This would mean growth of around 0%. We expect that markets could become choppy should we move closer to that reality. However, we believe that companies are doing the right things to drive growth over the long term. They have managed to grow in some very difficult periods over the last two years, and we continue to focus on finding management teams that have proven they are up to the task.
Preston May, CBE®
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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.