Earning Our Earnings: 3 Headwinds That May Affect Future Market Valuations

October 15, 2021

By Tim Courtney, Chief Investment Officer

Over the past 18 months, with just a few exceptions, the market has been in recovery and growth mode. This was aided by deferred demand, stimulus and low interest rates. Both companies and households have refinanced, accumulated reserves and have been in good position to continue spending and economic momentum.

Even though the market has grown — by August 2021, the S&P had doubled from its March 2020 trough1 — and profits have increased, the economy itself isn’t much bigger. The GDP rose 6.5% in the second quarter of 2021, just returning to the levels seen at the end of 2019.2 Now as we move beyond the recovery, the market will be more interested and sensitive to numbers that could threaten growth and valuations.

  1. Increased energy prices: In 2015, oil production rose for the seventh consecutive year, reaching levels last seen in 1972, and energy prices fell steadily.3 The next five years were great for consumers but extremely challenging for energy companies who were rewarded for their production success with rock bottom prices and bankruptcies. Now, companies are less willing to increase production and supply chain issues across the board have caused prices to skyrocket, bringing the national average gas price to $3.22 per gallon.4 There is concern that high prices at the pump and at home will start to pinch consumers’ spending in other areas.
  2. Inflation and interest rates: Aside from energy, prices are running higher in so many other areas that inflation may begin to get a foothold and affect the economy broadly.  For September, the Labor Department calculated the consumer price index at 5.4%,5 higher than expectations. Since a primary goal of investors is to earn a real (after inflation) return on their assets, we have generally seen interest rates rise when inflation moves higher. This, in turn, can begin affect the valuation of stocks.
  3. Government activity: The government has spent like never before since the start of the pandemic — about $6 trillion in stimulus as of June 2021.6 Markets have to grapple with what that means for the debt load and how it could affect taxes and future growth. The U.S. is currently about $28 trillion in debt,7 and it is likely there will be tax increases on both the corporate and personal sides to slow its growth. Unless this spending generates long lasting growth, higher taxes would cause decrease what profits and future growth would be otherwise.

Given that companies have been able to maintain profit levels, companies and households have healthier balance sheets and interest rates remain low, it’s understandable why markets have these valuations. It is also likely that there is more than enough momentum to continue growing into 2022. However, there are some headwinds blowing and rather than the relatively smooth ride higher we’ve recently experienced, it’s more likely we are going to have to earn our earnings moving forward.


1. CNBC (8/16/21) — S&P 500 doubles from its pandemic bottom, marking the fastest bull market rally since WWII
2. The Washington Post (7/29/21) — U.S. economy grew at annual rate of 6.5% between April and June, marking full recovery from pandemic
3. U.S. Energy Information Administration (11/7/16) — U.S. crude oil production in 2015 was the highest since 1972, but has since declined
4. CNBC (10/6/21) — Americans are paying the most for gas in seven years
5. Wall Street Journal (10/13/21) – Accelerating inflation spreads through the economy
6. CNN (6/2/21) — $6 trillion stimulus: Here’s who got relief money so far
7. The New York Times (10/6/21) — Explaining the U.S. debt limit and why it became a bargaining tool

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