The economy is expected to boom in the second quarter, and that’s good news for stocks
By Patti Domm
CNBC
Published:

The nation’s economic growth is in for a boost in the second quarter, as parts of the economy most impacted by the pandemic reopen. Never before has the service led the U.S. into a recession or so many trillions of dollars in stimulus have been applied. But with more Americans vaccinated and more states reopening activities, the economy could sizzle as retailers, restaurants, hotels, gyms and other service-oriented businesses see a sudden surge in demand. The stock market has been trading higher on these expectations for months. However, if the strong activity results in a better earnings outlook, it could further fuel the rally. The S&P 500 was trading at a record high Thursday, crossing 4,000 for the first time as the new quarter began. “Some of it is factored in, and if there’s a risk, it’s to the upside rather than the downside,” said Sam Stovall, chief investment strategist at CFRA. “From an economic perspective, we could be underestimating and that could end up providing a bit of a boost to the stock market unless interest rates rise even further.” Stovall said the second quarter is often positive for stocks, and the S&P 500 has averaged a 2.8% gain in the quarter since 1990. Stocks ended the quarter higher nearly two-thirds of the time. The S&P 500 closed out the first quarter with a 5.8% gain. Booming growth Economists forecast gross domestic product grew by a median 5.4% for the first quarter, which ended Wednesday. But estimates for the second quarter are much higher and have been rising. The median growth forecast for second quarter GDP is now 9.3%, according to the CNBC, Moddy Analytics Rapid Update Update of economists’ forecasts. “The consumer is the big story. It’s not just the stimulus bills. ... It’s the leftover stimulus money that’s accumulated in bank accounts,” said Ethan Harris, head of global economic research at Bank of America. The last two Covid relief bills approved by Congress paid individuals $600 in early January and $1,400 in March. “We think there’s $3.5 trillion sitting in bank accounts above and beyond the normal level.” said Harris. He said that calculation is based on estimates of what deposits will be once the latest round of stimulus enters the economy, as well as the trend in deposits. he recovery in good spending will boost service spending, Swonk said. Indeed, consumers are starting to travel again. Weekly hotel occupancy stood at 58.9% for the week of March 14 to March 20, according to data from STR, a research firm covering the hospitality industry. That’s the highest level since early March 2020. Harris expects economic growth of 10% in the second quarter, followed by 9% in the third. That should taper to 5% by the fourth quarter and then 4% in 2022. “The question is how much leftover spending power is still driving growth, ” he said. “To what degree do people have all this wealth and savings on their balance sheet.” Harris said as the burst of consumer spending begins to wane, business should help the economy maintain momentum. “As you move forward a bit, the investment side starts to become more important,” he said. “Business confidence keeps growing as the economy booms.” Stock strategists expect the trajectory for the market is higher, but gains are not expected to be as rapid as they had been. “You could have the market going up marginally but the multiples going down because the earnings growth is going to outstrip,” said Jefferies equity strategist Steven DeSanctis. “You’ve got all the good news already priced in so you need some incrementally good news, whether that’s going to be the earnings coming in better than expected.” DeSanctis said he does expect earnings outlooks to be revised higher.