The resilience of the U.S. economy continues to exceed our expectations. With encouraging progress toward ending the pandemic, and massive fiscal stimulus in place—and more likely coming soon, our prior economic growth forecasts may prove overly conservative. In addition, we believe a strong fourth quarter earnings season supports an increase in our earnings forecasts for 2021 and, in turn, our fair value S&P 500 target.
Economic Growth Poised To Accelerate In 2021
We are upgrading our 2021 forecasts for U.S. gross domestic product (GDP) growth from 4–4.5% to 5–5.5% [Figure 1]. When we first issued our GDP forecast for 2021 in Outlook 2021: Powering Forward back in December of 2020, we did not expect additional fiscal stimulus to pass until this year (it came in the form of a roughly $900 billion package passed on December 29), nor did we anticipate another $1 trillion or more to come this spring, which is now very likely given the Democrats have control of Congress. Our ETA for another package at this point is late March, with the Democrats pursuing reconciliation requiring just 51 votes in the Senate (including Vice President Kamala Harris and 50 Democratic Senators).
Stimulus is the primary reason for the increase in our economic growth forecasts, though we are encouraged by the progress made toward ending the pandemic in recent weeks. The holiday surge in Covid-19 cases has largely passed, and new daily Covid-19 cases in the United States have fallen roughly 60% from the January 8 peak. Meanwhile, the total number of patients currently hospitalized with Covid-19 has fallen below 100,000 for the first time since early December. The vaccine rollout in the U.S. has picked up speed—we are now averaging more than 1.3 million doses per day, according to the Centers for Disease Control and Prevention (CDC)—and additional vaccine candidates are likely coming soon that can help boost supply—in particular the Johnson & Johnson vaccine that is easier to transport and store.
Prospects for better U.S. growth should flow through to export-driven emerging market (EM) economies, so we have slightly increased our EM GDP growth outlook as well, in addition to our global GDP forecast.
Raising Our S&P 500 Index Fair Value Target On Stronger Earnings
The lockdowns and resulting deep recession from the pandemic led analysts to aggressively reduce earnings estimates last spring. Though not clear at the time, in hindsight those cuts have proved far too draconian. Earnings estimates for 2020 and 2021 bottomed in July and have been climbing steadily ever since, suggesting S&P 500 companies may recapture their 2019 pre-pandemic earnings power before the end of this year—a truly remarkable achievement considering the challenges.
A surprisingly strong fourth quarter earnings season increases our confidence in the outlook for corporate America. With about 60% of S&P 500 companies having reported, fourth quarter earnings for the index are on pace to grow about 2% year over year, according to FactSet—standing in stark contrast from the 13% decline reflected in analysts’ consensus estimate when the fourth quarter began on October 1, 2020. During just three full weeks of earnings reports, consensus S&P 500 earnings estimates for 2021 have increased by 3.6%, a period during which estimates typically fall 2-3%.
In light of the better U.S. economic growth prospects and impressive performance by corporate America during the most recent quarter, we are raising our 2021 and 2022 S&P 500 earnings forecasts from $165 and $190 per share to $170 and $195 per share. Higher corporate tax rates in 2022 present some risk to that forecast.
A stronger earnings outlook supports higher stock prices, in our view, so we are also raising our year-end 2021 fair value target range for the S&P 500 from 3850–3,900 to 4,050–4,100 (4–6% above the February 5 close). The new target range is based on a price-to-earnings ratio of just below 21 times our 2022 earnings per share forecast of $195 [Figure 2].
