While equity investors do face elevated prices in today’s market, they also have three important factors working in their favor: strong earnings, supportive monetary policy from the Federal Reserve and a broadening economic recovery as the pandemic wanes.

First, the most important sustenance for stocks—earnings—have continued to be very strong.  In the current reporting period, companies are mostly reporting better-than-expected numbers and in many cases are raising their financial forecasts for 2021.  While there are still some very weak parts of the economy, such as travel and leisure and bricks-and-mortar retail, the overall takeaway from the current earnings season is that companies have adapted well to the challenges the pandemic has posed and are performing well.

Second, the Fed continues to play an important role in supporting equity prices.  By pledging to keep short-term interest rates low for an extended period to support the economic recovery, Fed Chairman Powell has taken unexpected Fed rate increases off the list of potential risks for equity investors.  Long-term rates have continued to tick up, however, a healthy sign that investors are anticipating a robust economic recovery.  The U.S. ten-year Treasury note yield now stands at 1.28%, the highest level in nearly a year after spending most of 2020 in sub-1% territory.

Third, the U.S. economy, bolstered by a potential $1.9 trillion stimulus package from Congress and increasing vaccination rates, is likely to rebound strongly in 2021.  A recent Wall Street Journal survey of economists found that, on average, they are expecting the U.S. economy to grow 4.3% this year.  As vaccinations increase as we move toward summer, we expect a constructive narrative to form about how life is returning to many hard-hit parts of the economy.

With all of these tailwinds, what could possibly go wrong?