Despite Encouraging Signs, Investors are Feeling More Bearish Than Ever
Updated: Jul 16, 2020
On Wall Street, the S&P 500 currently sits at just 15 per cent off its February all-time high for this year, while the tech-heavy Nasdaq 100 has erased its losses for this year and climbed into positive territory.
Big-tech companies, who have recorded sales and earnings that have beaten expectations, have spurred on investors to act more bullishly in the face of stark future uncertainty. Despite companies in the S&P 500 suffering an earnings per share loss of 14 per cent for the first quarter of this year, strong reports from iPhone maker Apple and Microsoft, creator of the much-in favour Microsoft Teams, have helped to keep market optimism alight at a time when profits are dwindling.
Although the pandemic has disrupted Apples’ supply chain, caused store and factory closures, and forced new product launches online, CEO Tim Cook announced to shareholders at the end of last month that Apple had defied expectations by recording modest revenue and profit earnings for its second quarter of 2020 which runs from January through to March. Microsoft’s earnings are up thanks to a big spike in demand for its cloud services and recent profitability of the company’s three operating groups, Azure, Surface and LinkedIn.
Looking more broadly, Goldman Sachs forecasts that earnings per share for US blue-chip companies are set to reduce by a third this year, but then jump back up to levels reached last year, and even possibly beyond, if a robust economic recovery takes place — a combination of renewed consumer confidence, gradual easing of lockdown and social distancing restrictions and continued injections of liquiditty and quantitative easing from central banks will help turn such ambitions into reality.
Like Goldman’s, Pimco, a US investment management firm, takes encouragement from the unprecedented economic policy response which will help to facilitate the global economies transition from nasty near-term pain towards a slow and eventual recovery. They make sure to throw caution to the wind however. The broken global supply chain will take time to fix no doubt, and there is still work to be done to get the virus fully under control. As such, a U-shaped recovery in which economic activity slowly recovers then picks up again in the last quarter of the year is a possible scenario. More worryingly though, a prolonged L-shaped trajectory where the market lies stagnant at its bottom for a prolonged period time, or worse, a W-shaped trajectory where the market goes up and then comes back down again, are both very possible outcomes which investors need to bear in mind.
Despite some investors buying cheaper equities that are strongly driven by economic activity, many remain bearish as they become increasingly anxious about the unknowns such as whether there will be a second wave of infections leading to more market and corporate losses. The anxiety doesn’t stop there. Greater public and private debt brought about by inevitable borrowing, coupled with high levels of unemployment, each serve as red flags for investors who should expect a sluggish economic recovery. Of course, it is perfectly understandable for some of us to be seduced by a rebound that has seen global equities rise by roughly a third from their March sell-off lows which in turn, have driven up stock-market valuations. According to S&P data, the ratio of stock prices to expected annual earnings has reached 22 times for the S&P 500, way ahead of the index’s 20-year average of 16 times. Although optimists look kindly on such numbers, more cautious heads question the sustainability of such growth.
With markets on the rise as the global economy prepares to re-open its doors, some investors are feeling optimistically bullish. Others however, do not paint such a rosy picture of the future. Yes, we forsee things to return back to normality, but we cannot be certain when. As such, investors, especially those focused on equities, should ensure their portfolios are poisitioned to weather the inevitably tough year ahead before betting too heavily on the strength of an eventual rebound.