Equity markets remain in rally mode despite the rebound in coronavirus cases, with the S&P 500 IndexTM gaining in five of the past seven weeks. Last week’s gain was fairly broad-based, with a slight lead for small caps and growth indexes. June managed a gain of 2%, as the S&P 500 has now gained in three-straight months.
Recent market movement has been driven primarily by technical factors (momentum, sentiment, etc.) rather than fundamentals (earnings, economic growth, etc.). The market is forward-looking and historically leads the fundamental backdrop, but it will be critical for the economic rebound to continue and the earnings picture to improve to justify the move we have seen.
Earnings season unofficially starts next week, with management of more than 400 of the S&P 500 companies failing to provide guidance. This has led to estimate dispersion near record levels, likely resulting in heightened volatility in response. Since March 31, the estimate for 2020 has fallen by more than 20% while the S&P 500 has rallied by more than 21%, suggesting investors are looking beyond the near-term earnings weakness. Valuations have risen as a result, with the P/E on forward earnings jumping from 15x to 22x. Current estimates show second-quarter earnings falling 44% on a 12% drop in sales. Investors are likely to look through the weak 2Q earnings reports, making commentary on future quarters increasingly important.
The bulk of the 45k new coronavirus cases in the U.S. are from states that were earliest to reopen, with 43% coming from Florida and Texas. Many governors are moving to adjust the reopening schedule or forcing the closure of some businesses, worried that hospitals are on pace to be overwhelmed. While new cases have risen substantially over the past month, deaths continue to fall, with the 209 yesterday the lowest level since late March.
June’s payroll report beat expectations with a record 4.8m compared with an estimate of 3.0m and 2.7m in May. The positive report is just the latest better-than-expected report, with the Citi Economic Surprise at a record high mere months after hitting a record low. While the economy appears in full recovery mode, there are some high-frequency data points (public transportation, online job ads, restaurant bookings, small business hours, etc.) that show early signs of slowing, indicating that the coronavirus rebound is impacting consumer behavior.
The Shanghai Composite saw its best one-day gain since 2015 at 5.7% and has now rallied by 15% in just five days, on hopes for a strong economic rebound. The strength in global markets comes despite rising tensions between the U.S. and China as the U.S. plans to impose sanctions on certain Chinese officials over the moves in Hong Kong. Additionally, the E.U. is moving forward with plans to punish U.S. technology companies over perceived anti-competitive behavior, likely triggering a tariff response.
What to Watch
Vacation schedules have historically caused low trading volume this week, resulting in heightened volatility since the lower number of buyers and sellers create a less efficient market. Economic releases include PMI data on Monday, JOLTs on Tuesday, consumer credit on Wednesday and PPI on Friday.
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