July 27, 2020
STALLING ECONOMIC RECOVERY MAY SLOW STOCK MARKET RALLY
Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Ryan Detrick, CMT, Chief Market Strategist, LPL Financial
Stock market weakness late last week caused investors to ask whether the long-awaited market pullback may be at hand. This week, we review the drivers of the market’s impressive rally back to the break-even point for the year, share our thoughts on whether the gains are justified, and take a look at some timely data for clues on the state of the economic recovery.
UP AND DOWN WEEK
We have been expecting this rally to take a breather since COVID-19 cases began to accelerate in June and some reopening’s in Sunbelt and California hotspots were rolled back to combat the spread of the virus. The S&P 500 Index fell 1.2% on July 23 after solid gains the first part of that week, ending the week little changed.
Nonetheless, even as new daily infections remain near record highs and US-China tensions ratchet higher, S&P 500 stocks have been marginally higher year to date—and barely below their all-time highs. Market participants haven’t seemed too concerned about stock valuations, which are as high as they’ve been since the technology bubble. The S&P 500’s forward price-to-earnings ratio (PE) is over 20, even using consensus estimates for 2021 (source: Factsheet).