What does the market outlook look like in 2021

We thought there was no environment that could be worse than 2008-9. 2020 made the Great Financial Crisis look like an appetizer, so the market outlook is positive from here. And yet the market did so well. So where do we go from here? What are the market strategist predicting will have in store for 2021?

Market Outlook

The stock market seems to be in good shape. Stocks follow profits, and if profits are going higher, stocks eventually will. Earnings are recovering nicely, which tells us that fiscal and monetary stimulus is doing its job. Next year we could see earnings growth of 30%- plus. Goldman Sachs has predicted the S&P 500 reaching 4050 by the end of 2021. That is a 7.8% increase from today’s year-end close.

Some market strategists see the S&P 500 index rising further in 2021, propelled by a stronger economy, robust profit growth, and still-massive stimulus from governments and central banks, which paved the way for this year’s advance by keeping interest rates near zero. Even better, the market’s leadership could broaden well beyond big tech stocks to encompass financials, industrials, and other economically sensitive shares left behind by 2020’s rally. Much like the real estate market, the low interest rate environment is good news for stocks. The Federal Reserve’s actions to push down interest rates and bond yields encouraged those savings into risky assets to find a return.

The market likes a Biden win with a split Congress because it’s gridlock — you don’t get many surprises. Research from Capital Group shows that over the past eight decades, in 18 of 19 presidential elections, no matter which party won, a hypothetical $10,000 investment made at the beginning of each election year would have gained in value over the next 10 years, and in 15 of those 10-year periods, it would have more than doubled.

Barron’s interviewed 10 market strategists and chief investment officers on the outlook for 2021, below is the consensus: 

4,040 = The group’s average 2021 S&P 500 price target (today’s close is 3,726.86)

5% = Expected U.S. GDP growth in 2021 

$168 = Wall Street’s consensus earnings estimate for the S&P 500 in 2021. Compared with 2019 earnings of $161, and 2020’s forecast of $138

Caution Ahead

The outlook is not all roses… Areas of caution do linger, notably, huge hangover of debt, deep uncertainty about how consumer and office-worker behavior might have changed, inflation, and many small businesses clinging on by their fingernails. Inflation can be cause speed bumps. Resurgent inflation and an eventual rise in rates, which could put a lid on the market’s ebullience in 2022. “If inflation makes a significant and sustained comeback, the Fed is going to have to let interest rates go up. The impact on stock valuations, on compounding debt, on these zombie companies that have been able to stay in business only because of record-low interest rates—they’re toast,” Ed Yardeni of Yardeni Research.

There could again be a disconnect in how the markets and the economy do in 2021. The economy sees an aggressive recovery and that corporate earnings see an aggressive recovery. But the market returns are less robust, given that a lot of gains from next year have been pulled into this year. Much success will also depend on a smooth rollout of vaccines to protect against Covid-19. Any mutations in the virus that could extend the pandemic would cause Wall Street to rethink its bullish stance. Stay tuned…

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