The expectation that everything will proceed smoothly, however, limits potential appreciation through the end of the year. With all the good news priced in, valuations are quite high—the highest level in the past decade based on expected earnings. For markets to appreciate beyond that, things have to go even better than expected, which will be difficult.
Markets, for example, now expect earnings for S&P 500 companies to rebound to levels we saw in 2019, which would be an amazing recovery. Stocks, however, are well above the levels we saw then—which also suggests limited future appreciation. A great deal of good news is already priced in, which also suggests there are downside risks if things do not go as well as expected.
Looking at the numbers, the economy will still be in recession in the third quarter but should recover substantially from what looks to be a very weak second quarter. The fourth quarter should see the economy close to breakeven, with the very real prospect of a return to growth at the start of next year.
The stock market, in the form of the S&P 500, will likely finish the year around current levels, maybe a bit higher. Interest rates will remain low, as inflation remains under control and the Fed refrains from any increases.
Where Do We Go from Here?
The story for the rest of 2020 is continued healing—from the pandemic, economic damage and market turbulence. Although real risks remain and setbacks are inevitable, the outlook is positive. For the coronavirus, we know what to do and are doing it—and it is working. For the economy, the current momentum should keep us improving through the end of the year. And the market’s confidence in a positive outcome is a good sign for the future.
Despite the headlines, despite the risks, and despite everything, we move into the second half of the year in a much better place than anyone expected a couple of months ago. That is a very good place to start.
Brad McMillan is the chief investment officer at Commonwealth Financial Network.