This Rally Is Justified In Both Markets & Housing?

The stock market has had a great 2021 even though it entered the year more expensive than average. The market isn’t in an “everything bubble” even after the rally. There are opportunities to make money in the companies that will benefit from the reopening. Furthermore, we have seen strong S&P 500 EPS revisions. As you can see from the chart below, since June 2020 EPS estimates have risen about 7% which is the exact opposite of what usually happens. They usually fall about 5% in this period prior to reporting results. Estimates have only risen historically coming out of recessions and after the Trump tax cut.

Estimates are always beaten, but the past three quarters were much better than usual. It will be interesting to see how Q2 2021 turns out because expectations are heightened. Analysts expect 45.25% growth. Q4 2020 EPS already was a record for a quarter. Furthermore, the rate of estimate increases is actually going up. In this past quarter, Q1 EPS estimates have risen 2.57%. The 3-year average is a 2.92% decline. Energy estimates increased *185.81%*.

It’s clear energy earnings growth will be in the triple digits because of weak comps and higher oil prices. The biggest question is how much the internet companies are hurt by a return to normalcy. The big tech firms earn way more than the entire energy sector. If they see weakness, the market could correct. We are in an interesting market because six months ago the stay-at-home stocks did well which brought up the index. Now, the reopening stocks are doing well which is also boosting the index. It’s has been a win-win market for passive investors. We aren’t saying this won’t continue. It’s just that usually transitions aren’t this smooth.  

The Super Strong Housing Market

We think home price growth needs to cool off, but we aren’t in a housing bubble. When these high growth rates are comped, yearly growth will fall. Furthermore, an increase in interest rates will make these high prices less affordable. Finally, there was a housing craze during the pandemic caused by people moving to the suburbs. That has likely run its course now that we are extremely close to the end of the pandemic.

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