The bull and bear cases for stocks

Anthony Saglimbene, Global Market Strategist – Ameriprise Financial

Stock market ticker

As of November 15, 2021

Stocks have been winning quite a bit lately. After a rough September, the S&P 500® Index has posted several consecutive weeks of gains — supported by tailwinds from stronger-than-expected Q3 earnings reports and a strengthening labor market. Notably:

  • The S&P 500 added nearly +8.0% on a price basis from mid-October through the first week of November.
  • With most S&P 500 profit reports now complete, third quarter blended earnings per share (EPS) is higher by almost +40% year-over-year on sales growth of over +17%.
  • That’s substantially better than analysts’ estimates of a more modest +24% year-over-year EPS gain on sales growth of +12%.

Bottom line: Corporate America again materially outperformed profit expectations in Q3, despite investors’ concerns that supply chain and inflation pressures would cause more companies to miss expectations. As a result, the stronger-than-expected profit picture in Q3 has justifiably fueled higher stock prices, in our view.

While smaller businesses and consumers have had to wade through a still-messy environment in the wake of the pandemic, S&P 500 companies in aggregate have been able to manage supply pressures, pass on higher costs and protect profit margins. Demand remains strong, and company outlooks have been more upbeat than expected. Given the better-than-expected profit picture, stocks have reacted very positively over recent weeks.

Given this backdrop, it has become harder to discount the more bullish narrative. The Federal Reserve’s recent announcement to slowly withdraw monetary accommodation has added to market tailwinds. However, strong Q3 earnings reports, a healthy job market, a solid demand backdrop, healthy consumer balance sheets, some signs of easing supply chain pressures and a fiscal package that avoids more onerous tax hikes have also helped stock prices break higher.

Importantly, stronger-than-expected job growth could help fuel better stock sentiment into year-end. The U.S. economy added +531,000 new jobs last month, while the unemployment rate fell to 4.6%. Job gains in October came in significantly better than estimated, while employment growth in August and September was revised higher. In our view, more workers could slowly return to work as pandemic pressures fade, the savings rate comes down, higher wages entice people off the sidelines and activities continue the return to normal.

Aggregate demand for goods and services remains high and should be a strong incentive for businesses to continue hiring. We believe the labor market should further strengthen in 2022, particularly in areas depressed by the pandemic. This could be a positive for growth, spending and corporate profits next year.

On the monetary policy front, the Federal Reserve will slowly reduce its asset purchases beginning this month, with the entire program expected to wind down by the middle of next year. The Fed believes the U.S. economy is now strong enough to support a gradual reduction in the pace of its bond purchases — given the material improvement on the labor and inflation fronts since the depths of the pandemic.

In its most recent update, the Fed delivered as expected: It communicated a still-accommodative policy stance and further stressed the difference between tapering asset purchases and raising interest rates. The market liked what it heard, and we believe monetary policy will remain accommodative for the foreseeable future.

Given the still-strong macro backdrop, earnings growth and the potential for above-trend economic activity in 2022, we believe stocks could continue to perform well heading into next year.

Below are a few bullish and bearish points to consider as the year comes to a close. However, as we outlined above, investors appear far more interested in the bullish narrative.


Bullish considerations

  • COVID-19 trends continue improving as new cases come down from recent highs.
  • Federal Reserve policy remains supportive with interest rates remaining unchanged while tapering bond purchases.
  • The demand environment for goods and services is still robust, given healthy consumer and corporate balance sheets.
  • Healthy corporate profit margins continue along with strong stock buyback activity.
  • Continuation of favorable seasonal tailwinds supports broader investor impulses to “buy the dip” when stocks temporarily move lower.


Bearish considerations

  • Persistent inflation continues across a large swath of the economy and industries, potentially slowing profits and economic growth.
  • Supply chain disruptions, transportation bottlenecks and ongoing labor constraints temper economic growth.
  • The potential for a central bank policy mistake — either leaving policy too accommodative for too long or tightening too soon — could pressure stock prices.
  • In Washington, a debt ceiling miscalculation or underestimation of the knock-on effects of higher taxes presses on stocks.

If you have questions about your personalized investment portfolio, we encourage scheduling a review with your Ameriprise financial advisor.

Indices total return year over year table

S&P sectors calendar year 2021 returns bar graph

Data source for indices and sector graphs: Morningstar Direct, as of Nov. 8, 2021.

These examples are shown for illustrative purposes only and are not guaranteed. Past performance is not a guarantee of future results.