U.S. economy returns to growth mode

The remarkable resilience of the U.S. equity market is being echoed in the U.S. economy. Last month, the National Bureau of Economic Research officially announced the recession of 2020 was the shortest on record, lasting just two months and ending in April. Second-quarter GDP for 2021, which was announced last Thursday, showed economic activity exceeded the peak from Q4 2019. As Nationwide Economics worded it, “the economy has transitioned from ‘recovery’ to ‘expansion’.”

While real GDP growth of 6.5% for Q2 was below expectations, nominal growth (including inflation) was a remarkable 13%. Consumer spending typically accounts for around two-thirds of GDP. In Q2, consumers contributed 7.8% to GDP growth thanks to pent-up demand after the lockdowns and greater ability to spend due to high savings rates, continued government support and record levels of wealth.

This strong period of economic growth for the U.S. is expected to continue, with the IMF forecasting U.S. annual GDP growth in 2021 at 7.0% and 4.9% in 2022. Given that inflation is expected to remain elevated, strong nominal growth is a tremendous tailwind for corporate profits. Revenue growth for S&P 500® Index firms in 2021 is projected at 14% but is expected to fall to 6% next year. This is below the expected rate of nominal GDP growth, so that estimate will likely prove conservative. Upside to earnings is critical for continued market returns, given that the S&P 500 Index currently trades at 20-times next year’s earnings.