Economic growth is peaking...what happens next?

We likely saw peak economic growth in Q2 ... but that doesn't have to spell doom for the market and economy. U.S. Economic Growth is Likely Peaking – Does It All Go Downhill From Here? According to the Bureau of Economic Analysis, the U.S. economy grew at an annualized rate of 6.5% in the second quarter. Many areas of the economy are still in recovery mode, but for all intents and purposes, the U.S. economy is back to its pre-pandemic size – and we see plenty of runway for growth ahead. The surge of activity in the first half of 2021 was largely expected and has been great for many households and businesses. Consumer spending persists as the lead driver of the expansion, with spending up 11.8% in the three months ending June 30—the second-best performance since 1952. Business investment also rose 8%, adding 1.1% to the total GDP number. The drag on U.S. economic growth in the second quarter came from inventory drawdowns, which subtracted 1.1% from GDP, rising imports, and a decrease in federal government spending. According to the Bureau of Economic Analysis, nondefense spending on intermediate goods and services fell the most, largely due to a drop-off in Paycheck Protection Program (PPP) loans.1 --------------------------------------------------------------- [Have the Economy & Stock Market Returns Peaked?]( We are currently witnessing an economic boom right after an extreme collapse due to the 2020 pandemic. But what does this mean for the future? Have stock market returns peaked or is another downturn around the corner? Get answers to these questions and more with our just-released Stock Market Outlook report. This report contains some of our key forecasts to consider such as: - Zacks Rank S&P 500 Sector Picks - Zacks view on equity markets - What produces 2021 optimism? - An update on the outlook for Covid-19 - Top stocks in top industries - Sell-side and buy-side consensus - And much more If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT’S FREE. Download the Just-Released August 2021 Stock Market Outlook2]( --------------------------------------------------------------- The return to growth has been welcomed and also positive for the equity markets, in my view. But based on our forecasts here at Zacks Investment Management, the 6.5% Q2 growth rate is likely to be the fastest the U.S. economy will deliver in this cycle. Meaning, we may have just seen ‘peak growth’ in the economy, with spending and GDP expansion set to slow from here. The effect of stimulus payments is fading, there is a low likelihood of another round of direct transfers (fiscal stimulus), and the U.S. economy looks poised to settle into a more modest, sustainable rate of growth: Federal Reserve GDP Growth Estimates 2021 – 2023 (Median) Source: Federal Reserve Bank of St. Louis3 The moderating pace of GDP growth has some investors worried. If the economy has peaked, does it mean stock returns may have peaked, too? I think the answer is no – and history suggests it is, too. Take the period from 1995 to 1999, for example. Most readers remember this as a period of high-flying growth, thanks to the blooming age of the internet. Over those four years, the U.S. economy was averaging over 4% GDP growth – quite strong. The weakest growth year in that period was 1995 when the U.S. economy ‘only’ expanded 2.7%. But the weakest GDP growth year also delivered the strongest year for stock returns, with the S&P 500 rising over +35%. The stock market may have been discounting the strong growth years that would follow, granted, but who is to say 2022 and 2023 will not be better-than-expected growth years? One more example to offer some additional context. From 2009 to 2019, the U.S. economy averaged just 1.9% of GDP growth, which was about half the growth rate it averaged over the previous 20 years. Historically speaking, this was considered weak growth. But there was not a noticeably adverse impact for S&P 500 returns—from 2009 to 2019, the index rose +351%!4 The third-weakest year in the stretch, 2013, was also the best year for stocks in that bull market. Bottom Line for Investors The U.S. economy likely peaked in Q2 2021, and growth is poised to slow from here, in my view. But that does not necessarily spell doom for the U.S. economy or the stock market. Just because growth is slowing does not mean it’s stopping or reversing. As I look out at corporate earnings estimates, household and corporate balance sheets, business investment, and monetary policy (among other economic fundamentals), I see positive dynamics and a positive outlook. I have written before in this column that ‘growth is growth,’ even if it is slowing down from a peak or moderating over time. But I think it is also important to note that consensus has U.S. economic growth slowing from here, meaning that growth expectations are also falling. In my view, that’s good news for stocks – if growth expectations fall quickly, it means positive surprises are more possible, which I think is a key driver of returns. To be prepared for any market outcome, I recommend keeping an eye on key economic data releases, earnings reports, and other key economic factors. Our [just-released August Stock Market Outlook report](. will give you insight into all of it! This report is packed with newly revised predictions that can help you base your next investment move on hard data. For example, you'll discover Zacks’ view on: - Zacks Rank S&P 500 Sector Picks - Zacks view on equity markets - What produces 2021 optimism? - An update on the outlook for Covid-19 - Top stocks in top industries - Sell-side and buy-side consensus - And much more If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [FREE Download – Zacks' August 2021 Stock Market Outlook Report5]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. 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July 29, 2021.]( 2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion. 3[Fred Economic Data. June 16, 2021.]( 4[Yahoo Finance. August 10, 2021.]( 5 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion. Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals. 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