With financial markets awash in liquidity, equity investors shrugged off gathering macro risks during the first two months of the third quarter, with the S&P 500 Index gaining +5.5 percent from June 30 to August 31. However, in September, the number of risks such as the Covid-19 resurgence, rising costs, persistent supply chain issues, slowing economic growth, the federal budget/debt ceiling standoff, China property woes, prospective Fed tapering, negative earnings pre-announcements, spiking energy prices, and rising bond yields became too many to ignore. Consequently, the S&P 500 pulled back -4.7 percent for its worst monthly performance since March 2020.
Bottom-up earnings for the S&P 500 are projected to grow +28 percent year over year in the third quarter and +22 percent in the fourth quarter, bringing full-year 2021 growth to +45 percent. Corporate earnings growth will continue to slow into 2022 as year-over-year comparisons become more challenging. Consensus bottom-up estimates currently suggest +9 percent earnings growth for the S&P 500 in 2022 but do not yet include the potential drag from higher corporate taxes or the distinct possibility of sustained supply/labor shortages and lower margins.
We continue to believe that market volatility will remain elevated against a backdrop of highly unpredictable and interrelated variables, including the path of Covid-19, multiple fiscal policy issues (including corporate tax increases), monetary policy, and growth challenges in China. Sector leadership will remain highly dependent on these variables, and we remain watchful for opportunities to make larger “bets” as more clarity emerges over the next several months. In the meantime, portfolios remain highly diversified with an emphasis on quality, growth, and valuation.
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