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As good as it gets in the US

The annualised growth of the US economy in the first quarter of 2021 was 6.4%, up from 4.2% in the final quarter of 2020. A further increase to an incredible 11% can nevertheless be expected in the current quarter thanks to the generous US fiscal policy.

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Key takeaways:

  • US economic growth and corporate profits exceed even the most optimistic expectations, leaving less room for further upside surprises.

  • India is recording new highs in the number of Covid-19 infections, but the stock market hardly reacts, indirectly confirming the power of central bank liquidity provision.

All this pales in comparison, however, to the 46% earnings growth the S&P 500 companies are expected to report, based on the available earnings numbers. Doubledigit real growth rates and stellar company reports alike raise the question of how much room left there is for further upside surprises. Our equity strategists reiterate their shift in focus from cyclical to more defensive sectors.

Central bank liquididy driving stock market performance
Earnings growth is an important driver of stock market performance, but so is central bank liquidity – as the example of India shows. The official numbers of new infections are surging, and even government-related epidemiologists acknowledge that these numbers might only be the tip of the iceberg. Yet the stock market has hardly budged – precisely because of the ample liquidity provision. As long as the true dimension of the Indian tragedy cannot be assessed in more detail, the liquidity support might prevail.

Debating the timing of the tapering
It is not only the growth and earnings dynamic in the US that might have entered its final innings, but also the liquidity provision. We have already seen the Bank of Canada reducing its weekly purchase rate of government securities for the second time, and the Bank of England might follow suit despite the heightened uncertainty about the call for independence in Scotland. The closely followed US Federal Reserve is officially not thinking about reducing its purchase of US government bonds. But the stronger the economy gets and the higher the inflation expectations become, the more the market will debate the timing of the tapering, i.e. the reduction of purchases.

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Markets Explained

What is going on in the markets? Julius Baer’s experts share their views.

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