2021 kicked off with the announcement of the US Presidential election results on January 6. The election of a new President made it possible to stop the drawn-out political crisis of the last several years. A couple of months later, the public attention shifted from politics to post-pandemic economic recovery. Thanks to the bullish expectations, the main US stock market indices were able to bounce back to their historical highs by midyear.

However, in addition to old concerns, some new ones are emerging as well. New risks include expectations of the key rate increase, spiking inflation, and delays in coordinating new stimulus measures for the economy. Among the old concerns is the high cost of many popular companies that has already resulted in sector rotation from growth to value stocks.

Technically, the US economy is still in recession. The US GDP has not yet recovered to its pre-pandemic levels. According to the US government, the country’s GDP grew by 6.4% in Q1 and came close to the indicators of Q4 2019 in absolute values. However, analysts had to extend their forecasts on a full recovery.

Experts predict faster than usual growth for the US economy in the next few quarters. Initially, they expected the highest growth rate in Q4 2021, but now many have revised their projections and believe that the growth rate will peak at 8.8% already in Q2 2021.

In 2021, the US GDP is projected to grow by a total of 5.7% YoY, while in 2022 a more moderate growth of 3.7% is expected. These values ​​will be higher than the benchmark 3% the government is aiming for in the long run.

The consumer confidence index rose sharply following improvements with unemployment, increased wages and asset prices (real estate, stocks, and bonds). The PMI, an index based on a survey of purchasing managers, is firmly in the positive territory at around 60 points.

The economy has been considerably supported by the housing sector, and despite the ongoing fight with the pandemic, it was able to rise above the pre-COVID levels. Although this area of ​​the economy is currently cooling down, it still maintains pretty high levels. The recovery processes that have recently begun in other areas allow the housing sector to take a break without affecting the GDP growth in general.

Macroeconomic data that came out mid-June indicated a big jump in the Consumer Price Index. It caused quite an excitement in the investment world since it is generally accepted in investor circles that once inflation is out of control, it can be extremely difficult to get it back into the normal range. Nevertheless, many analysts believe that the current monetary overhang was formed due to last year’s low base effect and disruption of supply chains, resulting in a shortage of end products in retail stores. This is a more significant, albeit temporary, factor in consumer price growth than the fiscal support measures for the economy.

Investors are already mentally preparing themselves for the Fed’s reduction in the monthly purchasing of bonds from the market, done as part of its Quantitative Easing program. The investment community is growing concerned about the Fed’s inflating balance sheet that has reached $8 trillion, which makes this reduction welcome.

While the improving economy largely justifies the skyrocketing stock market assets, the analysis of public companies’ earnings indicates that the stock market is overvalued by 25%. This does not mean that the market is going to crash tomorrow. The current situation can continue for a long time until circumstances trigger a correction.

Another supporting factor for the market is the lack of worthy alternatives. The debt market is also significantly overvalued, which levels the risks of correction among the two asset classes. It is also worth noting that strong rotation between cyclical and defensive stock market sectors has kept both of them in the positive territory since early 2021. With the favorable macroeconomic data and corporate earnings forecasts, we expect stocks to remain positive in the second half of 2021 as the recovery continues.