D.A. Davidson: WM Research – Market & Economic Outlook 2021 – It’s a Post-Pandemic Market
We remain bullish on U.S. equities in 2021, as we see numerous potential catalysts to sustain the rally despite high valuations. At the risk of sounding like a broken record, equity valuations are elevated, with the S&P 500 index trading at 22.0x consensus 2021 earnings estimates. While we do not expect ongoing multiple expansion, we believe that the post-recession economic recovery will gain steam in the second half of 2021, supporting strong earnings growth well into 2022. Catalysts include GDP growth fueled by the vaccine rollout, new fiscal spending for COVID-19 relief, a resumption of year-over-year earnings growth in Q1 2021, continued accommodative Federal Reserve monetary policy, and low interest rates. Our S&P 500 fair value estimate is 4,000, which is approximately 8.1% above current market levels. This estimate is more bullish than our October estimate of 3,500, due to stronger than expected corporate performance reflected in Q3 2020 earnings reports, vaccine data that shows high levels of efficacy, and looking forward to 2021 and 2022. Elevated valuations come with elevated risk and we do not expect the market to move higher in a straight line. Investors should expect market volatility in 2021, and we would not be surprised to experience a pullback of 10% or more in the year ahead; however, we expect market pullbacks to be met with strong support from equity investors.
To say 2020 was a challenging year is a huge understatement, as COVID-19 exploded into a global pandemic, causing extreme economic and personal hardship. The U.S. has endured the loss of more than 310,000lives and a government-initiated economic shutdown causing a deep (but narrow) recession (that saw more than 32 million people receiving some type of unemployment assistance), and dramatic declines in equity markets as the 11-year S&P 500 bull market ended in March. But 2020 was also a story of innovation, resilience, and significant action from individuals, companies, and government entities. While many individuals lost jobs, others, as essential workers, remained on the front lines in medical, service, and manufacturing capacities, and millions of people adjusted to a remote work and learning environment. Thousands of companies addressed the pandemic shutdowns by implementing technology to enable digital work-from-home solutions that will likely continue in the post-COVID-19 world. In addition, Congress provided massive fiscal support through the CARES Act, and the Federal Reserve Bank quickly and dramatically lowered interest rates and expanded its balance sheet to stabilize markets. These actions collectively supported economic activity that bottomed quickly and sustained a recovery that was both faster and stronger than expected. In addition, promising drug treatment candidates were supported through highly successful public-private partnerships that produced therapeutic treatments after just a few months and, so far, two vaccines that were approved by the FDA in December. Financial markets responded early and favorably to the economy’s rebound potential following the March and April lockdowns, and by mid-August the S&P 500 had recovered all of the 34% peak-to-trough index decline in February and March to close at new all-time highs.
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