While massive stimulus spending has supported markets through the worst of the COVID-19 crisis, and investor sentiment has increased off the back of a number of promising vaccine trials and the tentative reopening of several economies, that might not be enough to avoid a repeat of the bad old days of March.
“A big trigger point is going to be as we come into the [second-quarter] earnings results that will start coming out in the next couple of weeks that will really lay out some more colour in terms of the market direction,” Bell Asset Management CIO Ned Bell told a Bloomberg webinar. “It’ll be the first time that we hear, particularly from US corporates, around what a full quarter of COVID conditions look like.”
The second quarter has been the strongest quarter for the S&P 500 in 20 years, but Mr Bell says that markets are pricing in “almost no risk” despite the fact that the reopening of many economies – including huge swathes of the US – is not going according to plan.
“How many companies can actually come out the other side of COVID and survive?” Mr Bell said. “Because the reality is [there are] a lot of really challenged companies that have [seen] distressed debt levels and have taken a huge earnings hit and markets are currently pricing in a pretty seamless recovery, which as days go by seems less and less likely.”
And with no end in sight – and cases continuing to rise in a number of US states – the earnings recovery that many analysts were forecasting for the second half of this year could be pushed back to the second half of next year.
“We’re taking a more defensive stance at the moment,” Mr Bell said. “We think the volatility in the second half will pick up once companies come out and talk about what is happening and how they’re coping with the COVID crisis, and that is a different ballgame… The risk that’s in front of us is very real, it’s still unfolding, but earnings estimates for next year are just too high and they need to come down.”
Other headwinds include the upcoming US election, which – fuelled by popular discontent and a rising COVID-19 death toll – could be bloodier than usual, and result in the unwinding of monetary and fiscal support.
“If we do have a change in the White House, that’s probably got ramifications for the extent to which fiscal stimulus could continue into next year… we can’t necessarily rely on stimulus from the government from now on in, and eventually markets need to start reverting back to fundamentals, and they have to start getting priced in at some point,” Mr Bell said.
