The stockmarket rally has found a ceiling

On Monday America’s S&P 500 stockmarket index entered positive territory for the year, before falling back. This rally may have found its top.

Who says markets are rational? asks John Authers on Bloomberg. Academics tell us that the market dispassionately crunches data to determine prices, but psychology still matters. On Monday America’s S&P 500 broke through the level at which it started the year before falling back. Whenever stocks enter positive territory for a year that has seen so much go wrong, even market bulls seem to start looking “for reasons to sell”. This rally may have found a “hard ceiling”.

This week saw the start of the US second quarter earnings season, giving investors an opportunity to gauge the damage wrought by lockdowns, says Michael Wursthorn in The Wall Street Journal. Analysts expect S&P 500 earnings to have fallen by 45% on a year before.

The V-shaped recovery has legs... 

This earnings season might actually help stocks, says Andrew Sheets of Morgan Stanley. Many companies will report that activity has picked back up since the trough in March, showing that the worst is behind us and we are now back in recovery mode. We don’t think markets have got carried away either: if they thought that we were heading for a painless recovery then small and cyclical stocks would be doing a lot better than they are. 

The reality is that “even a V-shaped recovery takes time”: we think it will be 18 months before growth in developed markets returns to normal. The V-shaped recovery still has legs, agrees Jim O’Neill on Project Syndicate. Government responses to the pandemic have “vastly exceeded” the post-2008 effort and rising savings rates could lead to a consumer boom. Key global indicators such as US employment, European and Asian purchasing managers’ surveys and South Korean exports have all improved markedly over the past two months.

Optimists hope that profits will follow the same pattern, writes Michael Mackenzie in the Financial Times. The rebound will not happen in a single quarter, but bullish analysts expect profits to jump by more than 28% next year as they recover ground lost to the pandemic.

... but longer-term problems pile up

Wall Street analysts are a “perennially optimistic” bunch, but the challenges are mounting, says Mackenzie. The latest Covid-19 spikes are a reminder that the virus has not gone away. In the longer term, governments will need to pay for the vast debt loads accumulated during the health crisis. That is likely to mean higher taxes on business. Michael Arone of State Street Global Advisors calculates that a full reversal of America’s 2018 tax cuts would deal a 7%-8% hit to S&P 500 earnings.

The high-tax scenario is looking increasingly likely. Donald Trump’s poor pandemic response means he will need “something close to a miracle” to be re-elected, says Jeremy Warner in The Daily Telegraph. A weakened president will be tempted to engage in sabre-rattling. The US and China squared off over the South China Sea this week – hardly propitious for global trade. Yet soothed by central banks’ monetary stimulus, “equity markets sail blithely on, apparently oblivious to the darkening clouds around the

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Covid-19: Second wave grows as US election nears
Stockmarkets

Covid-19: Second wave grows as US election nears

The second wave of Covid-19 is buffeting global stock indices, while US markets remain focused on the presidential election polls.
29 Oct 2020
Ant Group overtakes Aramco in world's biggest IPO
China stockmarkets

Ant Group overtakes Aramco in world's biggest IPO

Ant Group, China’s digital-payments giant, is set to launch the biggest initial public offering (IPO) on record. Where does it go next? Matthew Partri…
29 Oct 2020
Barclays’ bounce won’t last
Bank stocks

Barclays’ bounce won’t last

Barclays shares rose by 7% after it delivered “forecast-beating profits”. But the surge could be running out of steam.
29 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020