Wells Fargo Sees 'Intensified' U.S. Economic Recovery

Key Takeaways

  • Wells Fargo sees robust U.S.-led global economic growth in 2021 and 2022.
  • U.S. leadership in COVID-19 vaccinations is a key factor.
  • Inflation should remain manageable in 2021 and 2022.
  • Corporate profits and stock prices may soar to record levels.

The Wells Fargo Investment Institute (WFII), in its 2021 midyear outlook report, sees "intensified 2021-2022 U.S. economic recovery thanks to COVID-19 vaccines, expectations for accelerated spending of last year’s accumulated private savings, historically low interest rates, and the prospect of multiple government support programs." While noting that rising inflation rates, tax rates, and interest rates represent matters of concern, the report believes that these issues are unlikely to impede the recovery.

“There is a powerful macro mosaic at work with a steadily weakening U.S. dollar, rising commodity prices, strong global equity returns, low interest rates, a robust fiscal stimulus push, and falling equity and bond volatility,” according to Darrell Cronk, president of the WFII and chief investment officer (CIO) of Wells Fargo Wealth & Investment Management.

Outlook For 2021: Biggest Global Growth in 48 Years

The report projects that strong growth in the U.S. will lead the biggest global economic expansion in 48 years during 2021, while growth in 2022 will be at a pace that is still strong but more sustainable. Specifically, the WFII forecasts that U.S. real GDP will grow by 7.0% in 2021, leading a worldwide economic expansion of 6.2%, for the biggest increase since 1973.

The key driver of the global expansion will be the rate at which COVID-19 vaccinations proceed worldwide. The traditional role of the U.S. as "the global economy’s main growth locomotive" is being enhanced by its current position as the world leader in "vaccine deployment." 

The report also expects other key drivers of global growth to include: increased global consumer spending; the reopening of Europe and Japan; the expansion of world trade; and "leading-edge strength in manufacturing" in China.

Forecast For 2022: Continued Strong Growth

In 2022, the report forecasts continued strong growth in the U.S., with real GDP expanding by 5.3%. Fiscal stimulus, pent-up demand, and excess savings are all expected to diminish as drivers of growth in 2022. However, the WFII projects that growth will be fueled by a continued housing recovery and increases in wages and employment. They estimate that global real GDP will increase by 5.0% in 2022.

Record Profits and Equity Prices Ahead

The upshot of the robust recovery, per the authors, is likely to be record corporate profits in 2021 and 2022. Additionally, they project that the S&P 500 Index will soar to new record highs, closing 2021 in a range between 4,400 and 4,600 while the close for 2022 will be between 4,800 and 5,000. The S&P 500 closed at a value of 4,241.84 on June 23, 2021, meaning that these targets would represent gains of, respectively, 3.7%, 8.4%, 13.2%, and 17.9%.

The authors anticipate that, as the U.S. economy reopens over the next 18 months, corporate sales will expand sharply. Despite rising input costs and the prospect of higher corporate taxes, the report notes that companies made substantial progress cutting costs and increasing their operating leverage during the 2020 recession. Moreover, they also see these additional positives for profit growth and equity prices: increased labor productivity; a firming of corporate pricing power; supportive monetary policy; and public and private spending.

The table below presents the WFII's forecasts of earnings per share (EPS) for several widely-followed market indices.

Wells Fargo EPS Forecasts For Major Market Indices
Market Index 2020 Actual 2021 Forecast 2022 Forecast
S&P 500 $139 $200 $220
Russell Midcap $82 $130 $155
Russell 2000 $23 $72 $95
EAFE $95 $130 $145
MSCI Emerging Markets $65 $88 $105
Source: Wells Fargo Investment Institute

Inflation Remains Manageable, But Bond Yields Rise

While other observers, such as Deutsche Bank, are concerned that inflationary risks are very high, due to record fiscal stimulus, the WFII report projects that inflation will remain within manageable levels in 2021 and 2022, as presented in the table below.

Wells Fargo Inflation Forecasts
Inflation Measure 2020 Actual 2021 Forecast 2022 Forecast
U.S. Consumer Price Index (CPI) 1.3% 3.8% 2.8%
Developed Markets Inflation 1.0% 2.2% 2.0%
Eurozone Inflation -0.3% 1.3% 1.5%
Emerging Markets Inflation 3.4% 4.2% 4.4%
Source: Wells Fargo Investment Institute

The authors expect the federal funds rate to remain unchanged through 2022. However, they forecast that the yields on key debt instruments will rise, per the table below.

Wells Fargo Year-End Forecasts of Key Interest Rates
Interest Rate 2020 Actual 2021 Forecast 2022 Forecast
Federal Funds Rate 0.09% 0.00% to 0.25% 0.00% to 0.25%
10-Year U.S. T-Note Yield 0.91% 2.00% to 2.50% 2.25% to 2.75%
30-Year U.S. T-Bond Yield 1.64% 2.75% to 3.25% 2.75% to 3.25%
Source: Wells Fargo Investment Institute

Five Post-Pandemic Investment Ideas

The report offers several investment recommendations, and concludes with a section highlighting five ideas in particular. These are summarized below.

Put cash to work selectively. The WFII favors equities over fixed income given a strong economic rebound. They prefer U.S. large caps, U.S. small caps, and emerging market stocks, while also favoring established sectors, but advise investors to deploy their cash cautiously and incrementally.

Overweight cyclical sectors. The report advises investors to consider U.S. large cap equity sectors that tend to outperform early in a recovery. These include industrials, materials, financials, and energy.

Play defense in fixed income. The authors have increased their targets for long-term interest rates, but favor the intermediate part of the yield curve, since longer duration securities have more downside potential as rates rise. They favor preferred stocks and municipal bonds, the latter because tax rates are due to rise.

Stay with commodity price uptrends. The global expansion should continue to drive a wide variety of commodity prices upwards.

Favor equity and credit selection strategies in alternative investments. The report expects significant dispersion in returns among sectors, industries, and regions. Merger arbitrage and distressed debt may be areas that offer siginficant potential for gains.

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