U.S. real GDP increased by +6.5% at an annual rate in Q2.2021, picking up from the already strong +6.3% in Q1.2021
The Federal Reserve kept interest rates unchanged, as expected, at 0%-0.25%. Large-scale asset purchases of, at least, $120 billion per month will continue, until substantial further progress has been made toward its maximum employment and price stability goals.
The U.S. economy has made progress toward these goals, albeit the labor market is still "some way away" from justifying tapering, according to Chair Powell. The economy remains circa 7 million jobs short of its pre-pandemic level and 9 million jobs short of its pre-pandemic trend, although the pace of job creation has accelerated, from an average of 518k per month in Q1 to an average of 567k in Q2.
The pace of jobs recovery is expected to remain strong, going forward, with non-farm payrolls at +875k in July (data due on August 6th). Having said that, the decision when to announce to slow down asset purchases will depend on the flow of labor market data. There are two job reports before the September 22nd FOMC meeting.
U.S. real GDP growth was 6.5% qoq saar in Q2:2021 (12.2% yoy), broadly the same pace as in Q1 and below consensus expectations of 8.4%. The details of the report were constructive for growth, going forward. As a result, the level of real GDP climbed slightly above (0.8%) its prior peak reached in Q4:2019, though remains circa 2% below its pre-pandemic trend.
Looking forward, U.S. growth is expected to slowdown slightly, albeit continuing to grow at a significant average rate of 6% (annualized) in H2:2021. Business surveys support that view, with the ISM manufacturing remaining strong, albeit decelerating slightly to 59.5 in July from 60.6 in June.
The S&P500 surpassed the 4,400 threshold, hovering around all-time highs. Inflation-adjusted U.S. Government bond yields have declined to almost historical lows, with the 10-Year real yield at -1.18%. Low long-term real interest rates have been critical in supporting valuations, albeit from a dividend-discount model valuation perspective, have limited room to decline without escalating equity risk premia.
The U.S. equity market has also being supported by strong earnings growth. 2021 EPS estimates have been revised up by 19% since early January to $198. Regarding Q2 earnings season, so far, roughly 68% of the S&P500 has reported, and 86% have beaten earnings estimates versus a 5-year average of 75%. Apple, Facebook and Microsoft topped analysts' estimates by a wide margin, albeit price reaction was tepid. The bar for rewarding positive EPS surprises has moved higher.
As a result of decelerating macro economic uncertainty and strong earnings' outlook, many companies have increased or reinstated share repurchase programs, following a decline of 25% to $528 bn in 2020.
Indeed, in Q1:2021, S&P500 companies spent $171.5 billion on stock repurchases, with the Technology sector accounting for nearly 1/3 of the envelope. In Q2, Banks (e.g. JPM, GS, MS, WF) led the increase, as the Fed gave the green light to resume share buybacks. Overall, in 2021, buybacks are expected to increase by c. 35% year-over-year to $720 billion.