For the first six months of the year, the Dow Jones Industrial Average was up 12.7% while the S&P 500 Index rallied 14.4%, and the NASDAQ Composite rose 12.5%. Historically, strong stock market first halves bode well for the remainder of the year; Whenever there has been a double-digit gain in the first half, the Dow and S&P 500 have produced positive results, according to Ned Davis Research data going back to 1950.

The strengthening economic recovery from the coronavirus pandemic appears poised to broaden across regions and countries in the second half of 2021, bolstered by vaccine progress, continued fiscal and monetary stimulus, and pent-up consumer demand. The combination of economies re-opening, pent-up demand for services, and trillions of dollars of stimulus will likely result in a historic jump in economic growth. As such, the U.S. economy is likely to grow over 9% in Q2, helping to drive overall global growth to about 6% for the year. But this new economic landscape poses a number of critical questions for investors. A key one is whether growth will be strong enough to meet optimistic earnings expectations without fueling sustained inflationary pressures—the kind that could force the U.S. Federal Reserve (Fed) and other central banks to speed up a turn toward tighter monetary policy.

While we expect the global bull market to remain intact in the second half of 2021, with the sell-off potential limited to single-digit correction risk and not double-digit bear market risk, global risks remain. First and foremost, the greatest risk to the outlook continues to be the COVID-19 pandemic. Vaccine hesitancy and slow rollouts in parts of the emerging world heighten this risk. Premature removal of monetary and fiscal stimulus could also pose risks to the outlook. A potential trigger for reining back monetary stimulus is higher inflation pressures, although the Fed and most economists maintain the view that the near-term spike in prices will be transitory in most of the developed world.

While the equity markets can certainly go higher with this backdrop, the risk/reward tradeoff versus three, six, and 12 months ago is materially different now. At some point, the market will look through this surge in economic strength and profit growth and consider the sustainability of it all, especially when juxtaposed against all-time-high valuations. As always, we will continue to monitor the economic and investment landscape and adjust accordingly.