We continue to tilt investment portfolios toward secular and cyclical growth opportunities most levered to the upsurge in economic growth we expect over the next several quarters. Accelerating economic activity, supportive federal policies, rising excess liquidity, positive fund flows, and improving corporate earnings support continued upward momentum in domestic equities. Despite supply chain constraints, the U.S. economy is on pace for real GDP growth of around +11.0 percent in the second calendar quarter, followed by expected growth of about +5.0 percent in the third.
Earnings are now key to stock price appreciation, and in this respect, companies delivered in spades in the first calendar quarter. Thus far, over 87 percent of S&P 500 constituents reporting financial results beat the consensus earnings forecast, the highest percentage in at least the last two decades. As a result, bottom-up estimates for the S&P 500 suggest year-over-year EPS growth of +34 percent in calendar 2021, up from +26 percent at the end of March. Consensus estimates also imply roughly +12 percent EPS growth in 2022, but these forecasts do not yet incorporate the potential drag of higher corporate taxes. An upswing in M&A activity, share repurchases, and dividends provide added support to stocks. Near-term risks/uncertainties include euphoric investor sentiment, mounting inflationary pressures, rising bond yields, potential earlier-than-expected tapering of asset purchases by the Federal Reserve, a continued deceleration in the pace of U.S. vaccinations, the spread of Covid variants for which current vaccines are less effective, the slow rollout of vaccines in other nations, escalating U.S.-China tensions, and adverse tax-related headlines.
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