Recovering Economy Drives Bets For S&P 500 ETFs

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The S&P 500 has been flying higher and hitting new highs lately. This is especially true in the backdrop of fast recovering economy supported by continued progress in development of more COVID-19 vaccines, rapid vaccine rollout, reopening of the economy as well as new $1.9 trillion stimulus.

The combination of these factors has led to higher demand for all types of products and services in the economy. In particular, Americans will spend on big-ticket items such as vacations and weddings, companies will go on hiring sprees, and the transition to new technologies such as electric vehicles will accelerate. Additionally, signs of a healing labor market and upbeat earnings with rising earnings estimates for the next quarters bode well for economic growth.

Many analysts are bullish on the economy given the encouraging developments coupled with a new stimulus package. Jefferies expects GDP growth of 9.5% in the first quarter and nearly 7% for this year while Goldman foresees the economy to grow 5.5% in the first quarter and then accelerate to 11% in the second. New York Federal Reserve President John Williams projects GDP growth to be the strongest this year in decades with strong federal fiscal support and continued progress on vaccination.

When the economy improves, the stock market sees a boom. According to the Reuters poll last month, the S&P 500 Index will likely reach 4,000 by the end of this year. Many Wall Street strategists raised their target price on the S&P 500 with Credit Suisse lifting the target price from 4,200 to $4,300 by the end of the year.

However, the recent technology sector sell-off seems to be somewhat affecting the S&P 500 as yields are on surge. Higher rates tend to hit hard the technology sector as it relies on easy borrowing for superior growth. The value of the tech stocks depends heavily on future earnings, and as long-term yields rise, it lowers the present value of companies’ future earnings.

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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