The U.S. equity market has defied gravity over the past 12 months. The transition from bear market to tech-led rebound to pro-cyclical surge has occurred at a head‑spinning pace—a feature of this economic cycle that we don’t expect to subside any time soon. Markets are staring down an exceptionally rosy economic outlook. While this is undoubtedly a positive backdrop for equities, we must acknowledge that the past year of gains has changed investors’ starting point significantly. We draw from previous cycles to analyze what may come next for stocks.
The current equity market cycle has evolved remarkably quickly and has been dictated by the unique nature of the economic downturn. The COVID-19 recession has been more akin to a natural disaster than a traditional recession, and the U.S. government’s “kitchen sink” response has only enhanced that reality. As economic fundamentals have recovered rapidly, earnings expectations have followed, bringing equity prices along with them. In March, consensus forward 12-month EPS forecasts for the S&P 500 recovered to their pre-crisis peak levels, a full 11 months quicker than any of the previous four recessions.1 Consider that earnings expectations fell 21% to a trough in May 2020, the second-steepest decline for any downturn, and we can get a sense of the momentum that equity markets have been riding. Each phase of this market cycle—the crash, the rebound and the cyclical rotation—has transpired with unprecedented velocity, and we expect that will continue.1
S&P 500 earnings forecast recoveries
How long did it take forward 12-month EPS expectations to recapture the previous cycle high?
Bloomberg Finance, L.P., as of April 13, 2021. GFC refers to the global financial crisis of 2007–08.
Key takeaways
- In just over a year, U.S. equity markets have experienced a bear market, a tech-led rebound and an early‑cycle rotation.
- Explosive growth in 2021 is now taken as a given, and earnings forecasts have rapidly priced in this optimism.
- We still see upside for U.S. cyclicals; however, this has historically been the point in the cycle when investors should look to move toward higher-quality stocks.
- Opportunity remains for those who understand the segmented global recovery.
