We have previously argued that downside risks could see equity indices hit much lower lows, seeing the potential for the S&P 500 to fall below 2000. However, the substantial measures enacted on the stimulus front and a flatter infection curve likely lessens the downside, but does not limit it completely. The realities unfolding across developed world labour markets, extended lockdowns and the process of “opening up being just that, a process leaves the risk of disappointment at current levels very high.
The ongoing sharp contraction in both the real economy and corporate earnings leaves little margin for error at current above average valuations as the weeks ahead bring a raft of economic data and information to be incorporated into earnings forecasts. Should the present glass half-full prove too little of a buffer with stocks at current levels, we will see the resilience of the bounce back tested, regardless of the unbounded stimulus/Fed bailouts. However, the prospect of fresh lower lows seems to have lessened.