The bull and bear case for stocks

Anthony Saglimbene, Global Market Strategist – Ameriprise Financial
As of Feb. 16, 2021

Key Points

  • We expect U.S. economic and corporate profit growth to outperform long-term averages this year.
  • Boosting vaccination rates is critical to a potential second half surge in business activity.
  • More fiscal support is likely on the way with the proposed $1.9 trillion package.

Despite the S&P 500® Index falling in January, major U.S. stock index averages sit at or near all-time highs. As more of the economy recovers from coronavirus impacts, currently elevated stock prices have the opportunity to trace higher yet.

Notably, stock prices often follow economic and profit growth over time. In both areas this year, we expect growth to outperform historical averages. For instance: 

  • Earnings per share growth for the broader S&P 500 Index turned positive in the fourth quarter of 2020 — the first time since the final quarter of 2019. 
  • Earnings trends across a broader swath of large U.S. companies accelerated in the fourth quarter and show pandemic effects starting to fade. 

As a result, analysts are pushing up profit estimates for this year. Given the material earnings outperformance in the previous quarter, analysts feel more confident about the operating environment and companies’ ability to outperform expectations. Currently, S&P 500 earnings per share is expected to grow roughly +24.0% this year. In our view, such outsized earnings performance, if achieved, would be a strong fundamental driver to help support higher asset prices.

But we believe the distribution of vaccines is the single largest factor likely to drive growth across stocks and the economy this year. The rollout has been slow and uneven across the globe. Investors anticipate more of the U.S. population will receive vaccinations over the coming weeks and months. That is our view as well. 

Stock prices have primarily discounted that assumption, increasing the risk for investor disappointment if immunizations remain slow. However, the growing number of vaccines — including prospective vaccines such as  Johnson & Johnson's single-shot treatment — could play a vital role in meeting investors' expectations for broader uptake of vaccinations in the second half. 

While aggressive new variants of COVID-19 are concerning, health experts believe vaccinations remain the best path of protection. Over time, vaccines may be tweaked to address more virulent strains. Here, investors should focus on overall vaccination rates, which should further help the U.S. economy accelerate this year. 

In our view, the U.S. economy could grow by +4.0% in 2021, based on strong fiscal and monetary support as well as broader vaccine availability. However, that growth forecast is subject to potentially higher revisions if the size of the next fiscal stimulus package remains close to $1.9 trillion.

We expect the stimulus package to eventually pass Congress, as both Democrats and Republicans generally agree on more aid for those in need. Yet, both sides are far apart on the size and scale of added relief. In our view, Democrats are likely to use the budget reconciliation process to advance the stimulus package, as they may see their slim majority over the next two years as a small window of opportunity. It's important to remember that markets typically look beyond Washington drama. 

Bottom line: There is a tremendous amount of liquidity running through the financial system and supporting asset prices. It appears more could soon be on the way. Regardless of the dollar amount and political efforts toward the next stimulus package, we believe the fiscal side of the equation should remain a tailwind to asset prices.
  
That said, it is important to highlight both the bull and bear case for stocks. The table below helps balance risks and opportunities in the current environment. In our view, investors are best served if they continue to: 

  • Employ a modest preference for cyclical value stocks 
  • Utilize high-quality bonds defensively across a portfolio 
  • Maintain a well-balanced investment strategy 
  • Remain constructive on the prospects for the economy and asset prices 
The Bull Case For Stocks The Bear Case For Stocks
  • It's still a bull market
  • Federal Reserve support is massive
  • Strong fiscal support; More stimulus on the way
  • Stocks trump bonds in a low rate environment
  • Solid Semiconductor and Transport stock performance
  • The U.S. consumer could unleash more spending
  • Strong manufacturing
  • COVID-19 vaccines offer the road back to normal
  • A possible second half surge in demand/activity
  • Earnings growth should return in 2021
  • Small-caps showing strength
  • Valuations are stretched versus history
  • SPACs and shorted stocks flashing caution signals
  • Areas of the job market stalled
  • Areas of the business community still experiencing pain
  • Current coronavirus dynamics acting to slow activity/mobility
  • COVID-19 vaccine rollout slow and uneven
  • Timing and size of added fiscal relief uncertain
  • Expectations for economic growth are high
  • Expectations for earnings growth are high
  • Stocks reflect most of the "bull" case
  • Opportunities for outsized stock gains are shrinking
Sources: Bespoke Investment Group and American Enterprise Investment Services Inc.

Data source for indices and sector graphs: Morningstar Direct, as of February 5, 2021.

Past performance is not a guarantee of future results.

Unless otherwise noted, all data is sourced from FactSet as of 1/31/21. FactSet is an independent investment research management company that compiles and provides financial data and analytics to firms and investment professionals.
The views expressed in this material are as of the date published and are subject to change without notice at any time based upon market and other factors. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. This information may contain certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable.
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Investments in small-cap companies involve risks, including volatility, that are greater than investments in larger, more established companies.
Value securities may be unprofitable if the market fails to recognize their intrinsic worth or the portfolio manager misgauged that worth.
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A fund may invest significantly in issuers within a sector which may be negatively affected by market, economic or other conditions, making the fund more vulnerable to unfavorable developments in the sector.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The S&P 500 Index is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall US equity market. Over 70% of all US equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector. 
The S&P 500 Earnings Per Share (EPS) measures the composite earnings per share for the S&P 500. This metric comes from Standard & Poor and gives an idea of the overall EPS earned from the major US companies. 
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