Stockmarkets detach from reality

We look likely to be heading for a massive recession. But UK and US stockmarkets are up by baffling amounts.

Stockmarkets appear to have “left economic reality behind”, says Sam Benstead in The Daily Telegraph. Data suggests that we are heading for a massive recession, yet British and US shares are up 15% and 25% respectively since March. 

Simon Macadam of Capital Economics notes that a global economic contraction of 0.5% in 2009 was enough to send pre-tax profits at the world’s non-financial corporations plunging by 45%. With a 3% global contraction expected this year, the earnings hit this time will be much worse. As of early this week, S&P 500 earnings for the first quarter were forecast to have shrunk by 16% year-on-year, with around a quarter of companies having reported as part of the ongoing earnings season, says Morgan Stanley. Yet markets seem to be looking past the current data and betting that next year will be brighter. As the bank’s Andrew Sheets puts it: “If you give investors confidence that the worst is [over], history suggests they can put up with quite a bit of bad news.”

The US market’s resilience is not all it appears, says Carleton English for Barron’s. While the S&P 500 is just 17% short of its February highs, that performance has been driven by the five “mega-cap” tech stocks: Microsoft, Apple, Amazon, Alphabet and Facebook. They jointly make up 20% of the S&P 500. The median S&P 500 stock is actually 28% short of the peak. 

The renewed outperformance of US tech giants is unsurprising, says John Higgins of Capital Economics. The likes of Amazon and Microsoft are tipped to emerge as winners from social distancing measures while less virtual businesses may struggle. It is tempting to think that America’s richly valued stocks are set for a fall. Yet “if big remains best” in the “post-coronavirus world” then the US market’s long period of outperformance relative to other markets could endure.

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