More than a year into the global COVID-19 pandemic, we are beginning to see signs of a return to life as we knew it. Vaccines have been widely distributed throughout the U.S., which has helped decrease the spread of the virus as well as increase consumer comfort with in-person activities. Governments around the world have provided trillions of dollars in stimulus to bridge the economic weakness resulting from the pandemic. Here in the U.S., stimulus packages have totaled more than $5.1 trillion in the last year, which equates to about one-quarter of the size of our economy.

From a corporate perspective, earnings continue to grow at a surprisingly strong pace. The S&P 500’s projected revenues, earnings, and profitability are all at record highs—a result of solid demand, tight supply, and increasing prices. Businesses have been able to raise prices to pass their increased costs on to consumers and many have experienced productivity gains. Since the 2020 low, S&P 500 forward earnings have experienced a V-shaped recovery with an increase of more than 40 percent.

On the cost front, companies have reported inflationary pressures in many commodity-based inputs including oil, lumber, and basic materials. At their peak in early May, lumber prices had risen more than 400 percent over a year ago, though futures prices have since declined. Oil, copper, and steel prices have risen significantly in the last year. Some of the year-over-year comparisons may appear artificially high due to last year’s low base, but steel and copper specifically are at or near multi-year highs.

Employers have also struggled to hire enough qualified workers, which has resulted in some instances of wages rising to entice employees to fill empty positions. Some businesses have had to limit their operations or implement technology solutions to bridge the gap until they can hire more employees. Additionally, many companies have experienced challenges from logistics issues including port delays, higher shipping rates, semiconductor chip backlogs, and truck driver shortages. Thus far, many firms have been able to pass these higher costs on to customers, but we remain watchful for signs of margin pressure if that trend changes.

Many consumers have received sizable stimulus checks, with some of the funds being saved and some spent. With each government stimulus payment, we have seen personal savings rates spike. In March, the reading was nearly 28 percent, which is the second-highest reading in the last 80 years. However, the savings rate at the end of May had come down to 12.4 percent. As the country reopens alongside increased vaccination rates and lower COVID case levels, consumers are becoming more comfortable returning to activities including travel, shopping, and dining out. With the return of in-person events, apparel demand has been strong with notable increases in denim purchases particularly. Nonetheless, consumers still view the home as a core investment arena and have continued to spend on remodeling and redecorating their indoor and outdoor living spaces.

Within the financial arena, banks have reported low credit losses due to the financial health of their consumer base. In fact, many banks have released reserved funds that had been held for bad debt coverage, which was additive to earnings this quarter. Another driver was investment banking activity, which has also been strong. Mergers and acquisitions have increased as companies navigate the post-pandemic business environment. Activity remains elevated and capital is abundant, with the value of pending and completed deals rising over 90 percent from one year ago, according to Refinitiv. On the negative side, loan growth for banks has proven anemic, which tempered some of the enthusiasm from quarterly earnings.

Given the V-shaped recovery in equity prices that has accompanied the dramatic rebound in corporate revenues and earnings, many stocks that reported solid or even spectacular results last quarter saw relatively muted price moves after their announcements. In some cases, stocks even declined on good results due to the fear that they represent the peak of fundamental strength and anticipation that future quarters may be tougher. We are closely watching for signs of challenges ahead, ranging from inflation to the lack of supply of qualified labor, and the eventual tapering of government stimulus.  However, for the time being, corporations continue to post record earnings and are benefitting from the economic recovery. 

Originally published on July 7, 2021