Market analysis
3.22.21 | Market news

At a glance

Despite recent softness in markets, we expect economic growth and corporate earnings to tick higher over the course of the year. Consumer spending remains solid despite labor market uncertainties.

18 million

Roughly the number of Americans receiving unemployment benefits.

Term of the week


Volatility – A statistical measure of the difference in returns for a given security or market index ― in other words, large price movements over a short period of time. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.

“We raised our S&P 500 year-end price target from 3,960 to 4,320. Our target is based on a price-earnings multiple of 24 times earnings of $180 (above consensus estimates), 10 percent above Friday’s close of 3,913, and within a range of 4,625 (25 times earnings of $185, 18 percent above Friday’s close) and 4,025 (23 times earnings of $175, 3 percent above current levels).”

- Terry Sandven, Chief Equity Strategist, U.S. Bank

Global economy

Quick take: Consumer activity is strong because of stimulus and pent-up demand, but the employment situation remains muddled. Meanwhile, February’s winter storms dented industrial production, and housing activity decelerated from a boom that started last year. Globally, sentiment on future economic activity is improving.

Our view: Economic growth is positive overall, helped by reopening and government stimulus. Coronavirus case growth continues to trend lower, and vaccination progress is well underway. Overall, much of the global economy is now solidly in recovery.

  • Key points: hides details

    • Consumer activity remains strong, with U.S. retail sales rising 6 percent in February compared to last year, prior to the pandemic’s onset. The control group retail sales, which excludes volatile items and contributes to official gross domestic product (GDP) calculations, was up 10 percent over last year. While fiscal stimulus continues to support current consumption, the labor market remains a longer-term concern. More than 18 million Americans continue to receive jobless benefits, and we have yet to see a significant reduction in jobless claims.
    • U.S. industrial production decelerated in February compared to January and declined 4 percent compared to February 2020. Weather-related disruptions across the U.S. played a significant factor in the slowdown, so it will be of greater concern if March data (released mid-April) doesn’t reflect a strong rebound.
    • Housing market activity decelerated after a huge pickup that began in April 2020. Housing starts fell 10 percent in February compared to January and 9 percent year-over-year. Permits for new homes fell almost 11 percent. Meanwhile, the National Association of Home Builders Housing Market Index fell slightly, from 84 to 82, but remains near the all-time-high of 90 reached in November 2020, suggesting that homebuilders remain optimistic.
    • Global economic sentiment improved further. The U.S. ZEW survey of investors’ current assessment of the economy improved sharply to the best reading since the pandemic began, while expectations for future growth also rose. Eurozone sentiment improved also, though not as sharply. Overall, European expectations for future economic growth surpassed the previous post-pandemic high of expectations reached in September 2020. Meanwhile, expectations for future growth in Japan improved to levels not seen since the 1990s.

Equity markets

Quick take: The S&P 500 was mixed last week with a downward bias as interest rates inched higher. Our risk-on (more aggressive) bias is bolstered by economic reopening optimism, COVID-19 vaccination progress, additional government stimulus and higher earnings. Rising interest rates in response to fears of inflation looming have stoked concerns over valuation.

Our view: We maintain our “glass half-full” orientation for equities, bolstered by fundamental, sentiment and technical trends that are mostly favorable. Generally restrained inflation, relatively low interest rates and rising earnings provide valuation support and the basis for stocks to trend higher.

  • Key points: hides details

    • Volatility is likely to be the norm for the foreseeable future. While not our base case, stronger-than-anticipated inflation would likely be accompanied by increased volatility; inflation and higher interest rates typically result in valuation compression and more subdued equity returns.
    • Cyclical sectors lead year-to-date performance. The outlooks for both cyclical and strong secular sectors are compelling. Energy, Financials and Industrials ― cyclical sectors that tend to move with the overall economy ― are the best-performing sectors year-to-date, all beneficiaries of a resurgence in economic growth. Consumer Staples, Utilities and Information Technology are the worst-performing sectors, all in negative territory. The subdued performance of technology companies is perhaps most surprising given their strong, long-term growth characteristics.
    • Earnings are trending higher. Consensus earnings for 2021 and 2022 are approximately $174 and $200 per share, respectively, with upside bias, according to Bloomberg, FactSet and S&P Global. The first quarter reporting period begins in mid-April. At current levels, the S&P 500 trades at 22.5 times the consensus 2021 estimate, a level we deem elevated yet short of extremes when compared to past periods of similar inflation levels.
    • We raised our S&P 500 year-end price target from 3,960 to 4,320. Our target is based on a price-earnings multiple of 24 times earnings of $180 (above consensus estimates), 10 percent above Friday’s close of 3,913, and within a range of 4,625 (25 times earnings of $185, 18 percent above Friday’s close) and 4,025 (23 times earnings of $175, 3 percent above current levels). Our preliminary 2022 year-end price target is 4,600, 17.5 percent above Friday’s close, based on a multiple of 23 times earnings of $200.

Bond markets

Quick take: Higher Treasury yields dragged on returns across the bond market last week after the Federal Reserve (Fed) reiterated its plan to keep policy rates low to support the recovery. Longer-term bond yields continued their push higher on rising growth and inflation expectations paired with accommodative monetary and fiscal policy.

Our view: Improving expectations are pressuring Treasury yields higher (prices lower) while also justifying low incremental corporate and municipal bond yields over Treasuries. We prefer increasing credit risk in bond portfolios to generate incremental income and reduce exposure to rising Treasury yields.

  • Key points: hides details

    • The Fed reaffirmed its plan to maintain low interest rates and continue asset purchases. The Fed reminded investors that accommodative monetary policy remains appropriate because employment and inflation data are far from their targets. Investors continue to price in interest rate hikes much sooner than the Fed’s projections based on rapidly improving economic expectations, which is driving Treasury yields higher. Despite fundamental factors such as rising growth and inflation favoring higher Treasury yields, the Fed maintains the option to buy more (or longer-term) Treasury bonds if rising bond yields jeopardize the recovery.
    • Nontraditional and lower-quality sectors are key to fixed income outperformance in coming months. High yield corporates, bank loans, structured credit and mortgages not backed by the government offer investors the opportunity to increase bond portfolio yield while diversifying credit risk across categories. Taxable investors can increase yield by increasing exposure to high yield municipal bonds, which offer non-taxable coupon payments. Incremental yield over Treasuries is low in most bond categories relative to the past, but we believe they could remain low for some time. Our expectation for low but stable yields over Treasuries, infrequent defaults and strengthening credit fundamentals favors increasing credit exposure to generate incremental yield return.

Real assets

Quick take: The inflation recovery appears on hold, with defensive sectors, such as real estate and utilities, trading in line with the S&P 500 last week while commodities and commodity producers underperformed. The extension of coronavirus pandemic lockdowns across major European countries damaged demand growth expectations.

Our view: Our constructive view on economic growth and inflation should favor tangible goods producers, but the modest rise in interest rates likely dampens prospects for key defensive sectors. Real estate is likely a tale of two segments, one recovering as we reopen at the expense of the second ― secular growers, such as cell towers and data centers.

  • Key points: hides details

    • Real Estate traded in line with the broader market last week, while Infrastructure trailed by 1 percent and Utilities beat the S&P 500 by 0.50 percent. Industrial properties and hotels led real estate investment trusts while data centers and retail properties lagged. We believe these defensive sectors of the market are likely to remain under pressure this year.
    • Domestic crude oil prices fell 6.5 percent last week as negative headlines about European pandemic lockdowns and lower U.S. demand forecasts drove price action. Crude oil is still up 27 percent on the year. Energy sector equities trailed the broader market by 6.5 percent, but is still the top-performing sector this year with a total return of 31 percent.
    • Gold and silver both rose 1 percent last week. We believe the most likely moves in precious metals will be lower. As nominal and real interest rates move higher, we expect investors will seek better opportunities elsewhere.

This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The NAHB/Wells Fargo Housing Market Index is based on a monthly survey of members belonging to the National Association of Home Builders (NAHB). The index is designed to measure sentiment for the U.S. single-family housing market and is a widely watched gauge of the outlook for the U.S. housing sector. The ZEW Indicator of Economic Sentiment is a sample created out of the monthly ZEW Financial Market Survey. The ZEW Financial Market Survey is an aggregation of the sentiments of approximately 350 economists and analysts on the economic future of Germany in the medium-term.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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