Why one strategist doesn’t think the stock market rally is done: Morning Brief

Thursday, May 28, 2020

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‘In our view, equities can rise further from here.’

Since the March 23 lows, the S&P 500 is up 38.5%.

And investors are now focused on answering two questions — why are stocks up this much and will the rally continue?

Explaining the market’s rise has generated many different answers from many different sources. All investors really need to acknowledge, however, is that stock prices are higher now than they were a few months ago.

Which leads us to the perpetually unanswerable question of where stocks go from here.

And in the view of one strategist, the likely answer is “higher.”

“Although the S&P 500’s rally over the past two months is remarkable, we don’t think that it reflects excessive optimism among investors,” said Simona Gambarini, a markets economist at Capital Economics, in a note to clients on Wednesday. “In our view, equities can rise further from here.”

Gambarini’s primary thesis is somewhat similar to what Sam Ro outlined in the Morning Brief on Tuesday — corporate profits held in better than expected in Q1 and expectations aren’t overly rosy, with consensus estimates indicating that second quarter earnings per share are likely to drop 40%.

Nick Colas at DataTrek also highlighted in an email Wednesday morning that earnings estimates for the third and fourth quarter could be too low if the economy recovers as quickly as is implied by the recent rally in stocks.

“Right now, FactSet’s Wall Street consensus for Q3 is -25% earnings comps and Q4 is slated to be -12%,” Colas said. “These are certainly low bars to climb over if economic growth does, in fact, accelerate markedly from here.”

Gambarini notes that investors don’t expect corporate profits to hit pre-crisis fully until the second half of 2021, but argues that this assumption is underpinned by what she calls “fairly conservative assumptions about the progress of the virus.”

The stock market is off its lows, and it may have higher to go. (Getty)

Additionally, the market currently has a higher weighting towards the tech and communication sectors that have benefited from stay-at-home trades and the Fed’s support has taken the most acute financial crisis scenarios largely off the table.

“With all this in mind, the strength of the S&P 500 is not as irrational as it may appear,” Gambarini writes. “Assuming that the virus outbreak is slowly brought under control in the coming months, and economies gradually begin to re-open in that time, we would not be surprised to see the index advance a bit further.”

And while Gambarini’s expectations for higher stock prices is a bit more bold — though still a hedged call — than many other strategists, cases for optimism regarding the market have featured more prominently in recent research.

Last week, for instance, strategists at Bank of America Global Research led by the Savita Subramanian highlighted that factors including sentiment, fund flows, and the earnings outlook all argue for higher stock prices in the months ahead.

BofA’s sentiment tracker, for instance, points to the S&P 500 rising 14% over the next 12 months while the firm also notes that, “The case for stocks relative to bonds is still a no-brainer in our view, and we maintain a longer term bullish stance on equities.”

So while Wall Street analysts still aren’t calling stocks a screaming buy or calling this rally unimpeachable, the longer the market holds up the more we see folks re-thinking just how challenging the months ahead might be for investors.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

What to watch today


  • 8:30 a.m. ET: GDP Annualized quarter-on-quarter, Q1 second reading (-4.8% expected, -4.8% prior)

  • 8:30 a.m. ET: Personal Consumption, Q1 second reading (-7.4% expected, -7.4% prior)

  • 8:30 a.m. ET: GDP Price Index, Q1 second reading (1.3% expected, 1.3% prior)

  • 8:30 a.m. ET: Core PCE quarter-on-quarter, Q1 second reading (1.8% prior)

  • 8:30 a.m. ET: Durable Goods Orders, April preliminary (-18.0% expected, -14.7% in March); Durables excluding Transportation, April preliminary (-14.5% expected, -0.4% in March)

  • 8:30 a.m. ET: Capital Goods Orders Nondefense excluding Air, April preliminary (-0.1% in March)

  • 8:30 a.m. ET: Initial Jobless Claims, week ending May 23 (2.438 prior); Continuing Claims, week ending May 16 (25.07 million prior)

  • 9:45 A.M. ET: Bloomberg Consumer Comfort, week ending May 24 (34.7 prior)

  • 10 a.m. ET: Pending Home Sales month-on-month, April (-15.0% expected, -20.8% in March)



  • 6:45 a.m. ET: Burlington Stores (BURL) is expected to report a loss per share of $1.55 on $939.18 million in revenue

  • 7:30 a.m. ET: Abercrombie & Fitch (ANF) is expected to report a loss per share of $1.31 on $498.11 million in revenue

  • Other notable reports: Dollar General (DG), Dollar Tree (DLTR), Sanderson Farms (SAFM)


  • 4 p.m. ET: Ulta (ULTA) is expected to report earnings of 61 cents per share on $1.25 billion in revenue

  • 4:05 p.m. ET: Nordstrom (JWN) is expected to report a loss per share of $1.15 on $2.25 billion in revenue

  • 4:05 p.m. ET: Salesforce.com (CRM) is expected to report earnings of 69 cents per share on $4.85 billion in revenue

  • 4:15 p.m. ET: Costco (COST) is expected to report earnings of $1.91 per share on $37.52 billion in revenue

  • Other notable reports: Dell (DELL)


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