The stock market pulled back from all-time highs in the last few weeks of February, and we are entering a period likely to be dictated by a handful of prominent economic factors. Equity performance in March will come down to the combination of economic recovery, corporate earnings results, Federal Reserve policy, and inflation expectations.

Equity markets are being supported by a few important factors. Accommodative monetary policy is keeping interest rates low, supporting economic expansion and increasing the potential for inflation. All of these conditions stimulate stock prices. Economists, institutional investors, and many members of the general public are confident that falling coronavirus cases will lead to widespread economic recovery this year, with strong growth around the globe. Corporate earnings for the fourth quarter have mostly shown improvements in sales and profits as well.

The resulting optimism, combined with the impacts of Federal Reserve bond purchasing, has led to low cash balances in institutional and hedge fund portfolios. Asset managers love growth assets right now, supporting today's historically high equity valuations.

If any portion of these trends turns upside down, it could seriously disrupt the current bull market narrative. Here are three predictions about the stock market in March that investors should consider.

hand holding a crystal ball with growth bar chart

Image source: Getty Images.

1. Fiscal stimulus will impact stock prices

If the American Rescue Plan Act (the next wave of government stimulus) is signed into law, it should have immediate positive effects on the stock market. If the last two stimulus checks are a good guide, the next round will cause many individual investors to purchase stocks. It should also translate to higher sales for consumer goods companies. Those forces would push stocks higher in the immediate term, and this seems to be the most likely scenario.

The market already reflects the potential likelihood of that stimulus hitting bank accounts, so stock prices would likely come down if the bill can't clear the Senate. Moreover, fiscal stimulus is likely to cause some consumer price inflation. That's not a huge deal on its own, but it could have knock-on effects that motivate the Fed to taper its bond-purchasing activity to combat inflation. Fed tapering would ultimately bring markets back down, so we might be in for some volatility this month if all of this plays out.

2. Earnings season will wrap up strong

More S&P 500 companies and bellwether stocks will be reporting quarterly earnings in March. Earnings results have been really positive so far, showing a return to growth and profitability at the end of 2020. Target, Costco Wholesale, Ross Stores, AutoZone, Nordstrom, and Nike are among the retailers that will be provide updates on how retail faired over the holiday season. Zoom Video Communications and FedEx are also reporting quarterly results, and they should both provide insights on how consumer and corporate behavior may have permanently changed following the spike in remote work and e-commerce last year. A handful of big tech companies including Adobe, Hewlett-Packard Enterprise, and Oracle will also provide clues on the state of cloud computing growth.

I expect most of March's earnings reports to top analyst forecasts, and for guidance for 2021 to be generally positive. Brick-and-mortar retail might be a noteworthy exception to the rosy picture, as spiking COVID-19 cases late in 2020 forced a lot of people back into lockdown. Nonetheless, strong overall corporate earnings are a great complement to falling unemployment rates and improving consumer sentiment. These are necessary ingredients to keep the stock market moving upward, and they should continue being supportive. Risks that could trigger a market downturn mostly lie elsewhere.

3. Bond yields will be an important indicator

We saw 10-year Treasury note yields rise in February, as the bond market weighed the potential of higher inflation and rising interest rates. This is fueling speculation that the Fed will reduce its bond purchasing activity to reduce the amount of cash in circulation. This speculation seeped into the stock market, as higher yields pulled capital away from equities. Some investors became scared about the potential of wavering support from the Fed. This has been the primary force moving markets over the past few weeks.

If bond yields continue to rise, that could usher in more volatility or even a full-on market correction. If yields come back down, the market will probably tick upward as positive economic and corporate earnings news come in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.