Mid Quarter Review: GDP and Equity Performance

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Mid Quarter Review: GDP and Equity Performance

Two Data items today with a common theme: a mid-quarter review of Q2 2021.

#1: Momentum in the US economy. The Atlanta Fed’s GDPNow model is the most closely watched indicator of current macro trends. Unlike human economists who use some judgement in their GDP forecasts, GDPNow is purely algorithmic. As new economic data comes in, the model spits out a new estimate for current-quarter national output.

Here is the recent history of the GDPNow model’s Q2 estimates as compared to the Blue Chip economists’ consensus. At present, it is looking for 10.1 percent growth. That’s down from a high estimate of 13.7 percent in early May, clipped mostly by the weaker April Jobs Report. Human economists have been slowly raising their estimates. These currently stand at 9 percent Q2 GDP growth.

Takeaway: both the Atlanta Fed’s GDPNow model and the Blue Chip economists’ Q2 2021 estimates show a still accelerating US economy. Q4 2020 GDP ran 4.3 pct, and Q1 2021’s advanced reading was 6.4 percent. Either 9 pct (Blue Chip) or 10 pct (GDPNow) would be a continued improvement. This is important because Wall Street analysts still have down Q2 2021 earnings in their models versus Q1 2021 ($44/share versus $48/share). GDP and earnings don’t always correlate, but a 9 percent GDP growth reading should certainly support at least similar earnings in Q2 as Q1.

#2: A look at equity performance for Q2-to-date. The middle of a quarter is often a good time to assess what’s working (and what’s not) with an eye to making any necessary portfolio adjustments. It is also a long enough period of time (6 weeks) to see if broader investment themes are playing out as one expects.

Starting with US market caps and geographic regions (best QTD performer bolded):

United States

  • S&P 500: +3.9 pct
  • S&P 400 Mid Caps: +3.0 pct
  • S&P 600 Small Caps: +1.7 pct
  • Russell 2000: -0.4 pct

Takeaway: US small caps are still in the wilderness after having outperformed large caps by a historically unprecedented amount through February 2021. There’s nothing “wrong” with them aside from having been too much in fashion at the end of 2020. We continue to recommend overweighting large caps.


  • MSCI EAFE (non-US developed economies): +4.9 pct
  • MSCI Japan: -1.8 pct
  • MSCI United Kingdom: +8.0 pct
  • MSCI Germany: +6.0 pct
  • MSCI France: +9.4 pct
  • MSCI Italy: +4.5 pct

Takeaway: EAFE equities are playing catch up to US stocks so far in Q2, and they’ve almost caught up on a YTD basis (9.1 pct vs. 9.9 pct). That’s what you’d expect to see, but the gap should be larger than it is. EAFE has next to no Technology exposure relative to the S&P 500 (8 pct vs. 35 pct), and as we show later on Tech has been a significant Q2 laggard. We do still like UK equities here for their exposure to Financials and Energy.

Emerging Markets

  • MSCI Emerging Markets: +0.5 pct
  • MSCI China: -2.2 pct
  • MSCI Taiwan: -0.1 pct
  • MSCI South Korea: +0.8 pct
  • MSCI India: +2.3 pct

Takeaway: Year 2 of a global economic recovery should be when EM equities shine, but YTD MSCI EM is only up 3.8 pct and the first half of Q2 has been disappointing. Chalk that up to Chinese equities (37 pct of MSCI EM), where that negative QTD return has also pushed YTD returns negative (-1.3 pct). We’re still cautious on Chinese stock markets and prefer Taiwan or South Korea.

And now, here are the major industry sectors for the S&P 500, ordered from best to worst QTD performance:

  • Materials: +11.3 pct
  • Financials: +9.9 pct
  • Energy: +9.0 pct
  • Real Estate: +6.5 pct
  • Health Care: +5.6 pct
  • Industrials: +4.5 pct
  • S&P 500: +3.9 pct
  • Communication Services: +3.3 pct
  • Consumer Staples: +3.3 pct
  • Utilities: +2.1 pct
  • Technology: +0.8 pct
  • Consumer Discretionary: +0.6 pct

Takeaway: Almost everything about this QTD performance screams “cyclical recovery”. The only fly in the ointment is Consumer Discretionary, right at the bottom of the list. This group clearly got ahead of itself and has spent the last month digesting gains. Our recommendations remain the same: we like Financials, Energy, and Industrials.