Surprise 4: Crude Oil Soared
A Democratic sweep in the 2020 elections brought with it expectations for swift climate action, and, some thought, likely much lower oil prices. It may seem a bit counterintuitive, therefore, that oil prices and its investors have benefitted greatly since then, with crude oil starting the year at less than $50 a barrel but currently flirting with $70 a barrel.
The macroeconomic backdrop has played a large part. Coming out of the 2020 recession, risk assets, including oil, generally rallied strongly. While an unprecedented strong fiscal response was enacted to rescue the economy, investments tied to a reflationary environment, such as crude oil, saw outsized gains. The resulting ballooning deficit paired with a “risk on” market environment has seen the U.S. dollar generally fall since the market bottom in March 2020, buoying commodities broadly.
But, there have also been some specific policy actions that have propped up oil. Political analysts generally expected a swift resumption of the Obama-era Iran nuclear deal, which would have paved the road for Iranian crude to come back to market. This has still yet to occur, limiting global supply relative to prior expectations.
Meanwhile, at home, President Biden has generally sought to restrict U.S. oil production, lowering supply expectations and boosting prices. Finally, OPEC+ has so far generally cooperated well with one another, cautiously increasing supply and (narrowly) avoiding the breakdowns in negotiations that have led to supply gluts and lower crude prices in the past.
Surprise 5: Growth Isn’t Dead
Value stocks outperformed growth by 6 percentage points in the final four months of 2020 and we expected that trend to continue amid the early stages of the economic expansion. That thesis played out in the first few months of the year, as the Russell 1000 Value Index outperformed its Russell Growth counterpart by more than 12 percentage points through early March. However, since then growth stocks have staged a furious comeback, breaking out higher in absolute terms, while value-oriented sectors have largely stagnated amid falling Treasury yields. Through July 23, value and growth are separated by less than 1%, with both indexes returning approximately 17% year to date.
We believe value stocks will see leadership again in 2021 as Treasury yields rebound and the under-the-surface rotation continues. However, the first half of this year has made it clear that rumors of growth’s demise are greatly exaggerated. We believe a balance of both styles, with a modest tilt toward value, will be important for diversified investors over the historically volatile next few months.
Surprise 6: Blow Out Earnings
Coming out of lockdowns last summer, we were amazed by the pace of the economic recovery. Just as surprising was how well corporate America managed through the pandemic, putting the powerful earnings rebound near the top of our list of biggest surprises this year.
When 2021 began, the consensus estimate for S&P 500 Index earnings per share (EPS) was about $167. Today that number is about 14% higher at over $190 (Source: FactSet). This is impressive on its own. But considering estimates have historically fallen by an average of about 10% during calendar years, it’s even more impressive.
Companies have simply blown away expectations, having delivered some of the biggest quarterly upside surprises ever recorded, even under challenging conditions. The pandemic disrupted supply chains, bringing shortages of key materials and labor. Input cost pressures from a variety of sources weighed on profit margins. Yet, despite these challenges, in 2021 S&P 500 companies are on track to exceed the pre-pandemic peak in earnings by more than 20%. Our forecast for S&P 500 EPS in 2021 is $195, a nearly 40% increase over 2020.
Conclusion
There are always going to be surprises when it comes to investing and 2021 is no different than any other year. Still, our big calls this year, included stocks significantly outperforming bonds and the economy likely seeing one of its best years ever, are alive and well so far.
What could the rest of 2021 hold? We’d be willing to bet there will be more surprises for sure, but the good news is the economy continues to improve and the earnings backdrop is spectacular.
Ryan Detrick, CMT, is chief market strategist at LPL Financial. Jeff Buchbinder, CFA, is an equity strategist at LPL Financial.