1. The recovery: economic growth and earnings strength
More than a year on from the start of the pandemic, the economic recovery is now well and truly underway. Growth forecasts are strong, and continue to be revised higher. Indeed, we may see growth exceeding 7% in the US in 2021 compared to the -3.5% contraction in 2020, while growth in the UK may well exceed 6%. Purchasing Managers’ Index (PMI) surveys, a gauge of economic activity, have registered strong gains in 2021 for the US, UK and Eurozone. In the UK, the Services PMI has enjoyed a notable boost in recent months, from 39.5 in January 2021 to 62.9 in May, as Covid-related restrictions were eased, and retail and hospitality venues reopened. Importantly, savings rates remain comparatively high in both the US (14.9% for April 2021 versus 8.3% for February 2020) and UK (16.1% for December 2021 vs 7.7% for December 2020), suggesting significant levels of pent-up consumer demand. All this positive economic data is reflected in broad optimism from markets, and forecasts for S&P earnings remain upbeat with the earnings recovery expected to continue into 2022. But how long can companies continue to beat expectations and is this optimism overdone?