The U.S. economy’s recovery from the pandemic continues to surpass our expectations, aided by the accelerating vaccine distribution, massive stimulus, and America’s desire to resume some semblance of normal daily life. Despite having raised our 2021 economic and earnings growth forecasts on February 8, we are doing so again. We are also raising—and narrowing—our 10-year Treasury yield forecast range. Our S&P 500 Index target remains unchanged.
Vaccines + Reopening + Stimulus = Historic Growth
The rapid distribution of COVID-19 vaccines in the United States—now over 3 million shots per day—is bringing us closer to a fully reopened economy. That expected reopening, combined with a massive amount of fiscal stimulus has exceeded our earlier expectations, leaving economic growth forecasts overly pessimistic.
Since the first vaccine candidate was approved in early December 2020, the United States has administered over 150 million doses and has fully vaccinated 16% of the total population, according to data from Johns Hopkins. Although cases have risen in some states in recent weeks, we expect vaccinations to win the race against COVID-19 variants this spring and facilitate the full reopening of the economy by June. The current pace of over 3 million shots per day puts herd immunity potentially within reach by early summer, when more than 70% of adults in the U.S. could potentially have the antibodies through vaccine or infection.
In addition to the surge in economic activity that is accompanying the reopening, the federal government has passed $5 trillion in fiscal stimulus packages in 2020 and 2021 to fight COVID-19 and mitigate the pandemic’s economic impact. Most recently, President Biden signed a $1.9 trillion stimulus bill into law on March 11, 2021—the impact of which has barely been felt.
Yet, more is on the way because a big infrastructure spending bill will likely be passed over the next four to six months—almost certainly without Republican votes. On March 31, 2021, President Joe Biden proposed spending $2.25 trillion on infrastructure over eight years, though the Democrats may not be able to get all of it done through the reconciliation process that requires only 50 votes in the Senate (plus the tie-breaking vote from Vice President Kamala Harris)—but comes with restrictions.
While it is debatable whether this much additional government spending is prudent following the historic amount of debt-financed fiscal support put in place over the past year, there is no debating that some of that additional spending will boost economic growth (for those keeping score, the fiscal pandemic relief bill is already over 25% of GDP). In addition, we don’t expect the Federal Reserve (Fed) to do anything this year to slow the economic rebound.
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All index data from FactSet.
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