Founding father James Madison said: “The circulation of confidence is better than the circulation of money.” As we’re currently seeing, confidence does indeed beget prosperity.

As vaccination rates increase and government stimulus checks flow into the economy, indicators point to a robust recovery. One of those indicators is rising confidence, a fragile but powerful force.

This earnings season, management teams from all corners of the market are issuing some of the rosiest business forecasts since last year’s coronavirus outbreak. A number of these businesses are deploying their idle cash into capital investment and mergers and acquisitions, laying the groundwork for faster economic growth down the road.

The Conference Board’s Measure of CEO Confidence rose in the first quarter of 2021, following a dramatic rise in the previous survey. The measure currently stands at 73, up from 64. This represents the highest level of CEO confidence since Q1 2004, when the measure stood at 74. A reading above 50 indicates more positive than negative responses.

From Wall Street to Main Street…

The stock market’s next leg up will have a lot to do with rising confidence on Main Street, not just Wall Street. The National Federation of Independent Business (NFIB) Small Business Optimism Index rose 2.4 points in March to 98.2. This reading for March (which is the latest available data) marked the first return to the average historical reading since last November. This optimism coincides with a rally in small-cap stocks.

Improved revenue and earnings growth forecasts from companies of all sizes have slowed the pace of layoffs, which has fostered a marked improvement in consumer confidence. The latest Conference Board Consumer Confidence Index rose sharply in April to a 14-month high, following a substantial gain in March.

The Consumer Confidence Index for last month stood at 121.7, up from 109.0 in March. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, jumped from 110.1 to 139.6. The Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, rose from 108.3 last month to 109.8 in April.

Growing confidence also stems from massive fiscal and monetary stimulus, which has put money into the hands of struggling individuals and businesses.

Watch This Video: What Uncle Sam Got Right About The Economy

Consumer spending has bounced back, helping keep the post-election stock market rally alive. That said, stocks closed mixed Tuesday on fears that the economy would overheat and cause interest rates to rise. The Dow Jones Industrial Average rose 19.80 points (+0.06%), the S&P 500 fell 28 points (-0.67%), and the tech-heavy NASDAQ declined 261.62 points (-1.88%).

In pre-market futures contracts Wednesday, all three U.S. indices were trading in the green, after Treasury Secretary Janet Yellen on Tuesday walked back previous comments that rate hikes might be necessary to quell inflation. It was Yellen who spooked the markets Tuesday, with ill-considered musings that the Federal Reserve (which she once led) might have to get hawkish.

Rising profits…

Wall Street is increasingly confident about Q2 earnings. During the month of April, analysts significantly boosted second-quarter 2021 earnings per share (EPS) estimates for S&P 500 companies. The Q2 bottom-up EPS estimate rose by 4.2% (to $43.73 from $41.98) during this period. “Bottom up” is an aggregation of the median EPS estimates for Q2 for all the companies in the index. See the following chart:

In a typical quarter, analysts reduce EPS estimates during the first month of the quarter. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.0%.

Q2 2021 marked the second-highest increase in the bottom-up EPS estimate during the first month of a quarter since FactSet began tracking this metric way back in 2002, trailing only Q1 2018 (+4.9%). Q2 2021 also marked the fourth straight quarter in which the bottom-up EPS estimate increased during the first month of the quarter.

After the strong run stocks have enjoyed since the November 2020 election, a modest pullback at some point this year would not be the least bit surprising. But the strength and breadth of the market’s advance over the past few months nevertheless augurs even greater gains over the course of this year.

With inflation in check (so far), faster economic growth has been a boon for corporate profits, and with it stock prices. The high likelihood the Federal Reserve will continue to buy up bonds on the open market only increases equities’ attractiveness. Economically sensitive stocks make the most sense now.

With the exception of a few downside surprises, first-quarter 2021 earnings have been bullish, with many companies (especially Big Tech firms) surpassing analysts’ expectations. Even more encouraging, most of the gains were driven by unit growth rather than cost cutting.

Meanwhile, the housing boom is enhancing the “wealth effect” among consumers. In March, the median single-family home in the U.S. sold for a record $335,000 and spent on average only 18 days on the market. It took twice as long in March 2019, when the median price was $261,500, according to the National Association of Realtors.

Cashless is King…

During the pandemic, quarantined consumers got accustomed to mobile cashless payments, more than ever before, because of lockdowns and social distancing. As COVID restrictions ease and consumers get more confident, this trend will accelerate.

Once the global economy gets on the other side of the coronavirus crisis, the cashless payments segment will explode on the upside. The pandemic has caused seismic shifts in buying habits, consumer expectations and workplace practices.

After months of painstaking research, we’ve unearthed a small, little-known company that’s in the best position to leverage these mega-trends. For details, click here.

John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com. To subscribe to his video channel, follow this link.