Most of the commentary I hear around why the U.S. stock market has gotten off to such a strong start in 2021 focuses on governmental fiscal stimulus and the Federal Reserve’s intent to keep their target funds rate low for as long as the data can possibly justify doing so. While strong consumer spending will help businesses rebound from the pandemic, and low rates support elevated valuation multiples, I think the underlying profits being generated now, and those expected over the next 12-18 months are even more of a tailwind for stock prices.

As 2021 began I wrote in my quarterly client letter that consensus expectations for a record high S&P 500 profit figure in 2021 (easily surpassing 2019 levels), while certainly possible, didn’t seem like a sure thing. With the index trading for nearly 23x those estimates back in January, I was cautious about the potential upside this year.

It appears that cautiousness will prove to be unnecessary. Since January 1st, the 2021 profit forecast for the S&P 500 has actually increased (and done so meaningfully) from $164 to over $185. As the S&P has risen about 10% so far this year, profit expectations have been bumped up even more (about 13%). What that tells me is that the narrative of an economic boom post-pandemic (surely aided by government stimulus) is alive and well, and is very possibly going to result in absolutely stellar corporate profit growth.

While I would love for the U.S. market to be cheaper (we are trading at 20x 2022 profit estimates), I take comfort in the fact that the core fundamental driver of equity prices (earnings) is at least going in the direction it should be to justify these prices. Time will tell if the 2022 estimate ($208) can be surpassed as well, but if that number is in the ballpark, and the 10-year bond stays under 3% (plenty of room to lift from here without being a big deal), one can make the argument that the market generally is not in a bubble. And the recent calming down of the likely bubble in the profitless subset of the tech sector is a welcomed development too.

As is should be for those of us who focus on longer term fundamentals rather than day to day headlines, I think earnings will tell the story this year and next and for that I am thankful (until we have reason to fear a material economic slowdown).