The Fed dramatically raised its economic forecasts last week at its monthly rate decision press conference. With President Biden’s promise to make all US adults eligible for vaccination by May, raising the prospect of an accelerated re-opening of the economy, and the passing of the $1.9 trillion stimulus bill into law, the US central bank now sees US GDP growth for 2021 hitting +6.5% (a major upgrade from the +4.2% it predicted in December). The Fed also expects the unemployment rate to fall to 4.5% and inflation to rise, but only to 2.4%. These are improving and bullish forecasts for the US economy as it emerges from the pandemic-induced declines of 2020.
Recent economic data supports the more bullish economic outlook from the Fed. The New York Empire State Manufacturing Index jumped to 17.4 in March from 12.1 in February, beating market forecasts and pointing to the strongest growth in New York business activity since November 2018. Remember: New York suffered the worst economic impact from COVID of any state in the US in 2020.
Corporate earnings results of US companies in the last 3 months of 2020 were also ahead of expectations, and the estimated earnings growth rate for S&P 500 companies in Q1 2021 is now +22.1%. If this prediction is correct (we think the real number could be even higher), it will be one of the highest year-on-year earnings growth rates reported by the S&P 500 index in its history. Much like the Fed’s estimates, these earnings forecasts are also a significant upgrade from the predictions of just several months ago. It is clear the direction of travel for the economy, and associated predictions for 2021, is positive.
If these forecasts are right (or as we believe, likely to be exceeded), then it will quite probably be a strong catalyst to propel the next leg up for equity markets through the remainder of 2021 and into 2022.