Why US Economic Conditions Are 'Just Right' For The Stock Market Rally To Continue

In the second quarter, two of the biggest fears among investors were that wage growth and inflation would run too hot.

Heading into the third quarter, inflation remains well above historical norms, but there’s also a growing concern that GDP growth could disappoint and corporate earnings and guidance will start showing signs of peaking.

Economic Sweet Spot: On Tuesday, the Labor Department reported the consumer price index increased 5.4% in the month of June, its largest gain in nearly 13 years. However, the Federal Reserve has said elevated inflation levels will be “transitory” as the economy reopens to full capacity following the pandemic.

Bank of America analyst Jared Woodard believes the U.S. economy is in a sweet spot of bullish equity market momentum, rising employment, and a favorable credit market that will keep stocks rising in the second half of the year.

“We see ‘just right’ conditions for equities & credit given consumer strength, credit market dry powder, and easy policy,” Woodard wrote in a note.

Related Link: 477 Days And Counting: How The Current Post-Pandemic Bull Market Compares To Bull Markets Of The Past

Bullish Catalysts: The Bank of America team estimates U.S. consumers have $2.5 trillion of excess cash following the pandemic. Woodard said Tuesday 70% of that excess cash is held by the wealthiest 20% of Americans, which have historically invested excess cash into stocks and savings.

U.S. banks have massive balance sheets, which was recently confirmed by the annual stress tests. Woodard said that dry powder can help facilitate productivity growth once the new capex cycle begins in the second half of the year.

Finally, Woodard said the outlook for central bank and political policies is favorable heading into the second half of the year. The infrastructure spending bill is likely already priced into the market at this point, and it’s not too large to contribute to excess stimulus hyperinflation concerns. In addition, the Fed isn't expected to raise interest rates until 2023, so fears over rising rates will likely not hold back stock prices in the near term.

Benzinga’s Take: The SPDR S&P 500 ETF Trust SPY has generated a 99.8% total return since the market hit its pandemic bottom on March 23, 2020. The stock market is clearly pricing in some extremely high recovery expectations, but given more than $6 trillion in stimulus measures, extremely easy year-over-year comps and no major obstacles on the horizon, the S&P 500 appears well-positioned to continue its bullish momentum in the third quarter and beyond.