9. Corporate earnings are likely to continue struggling. Close to 150 of the S&P 500 companies have suspended earnings guidance, nearly 100 have stopped stock buybacks and nearly 50 have actually cut dividends.3

10. Inflation could start to rise by 2022. The aggressive and coordinated expansion of monetary and fiscal policy is designed to be reflationary. Depending on how long this stimulus continues, it could disrupt the long-term disinflationary forces such as technological and productivity improvements that have taken hold over the last decade. We may start to see signs of inflation next year.

Risks To Stocks Seem Balanced, But We Have A Modestly Positive Long-Term View
When markets bottomed on March 23, we believed that point could be the low for the cycle. When stocks subsequently climbed 25%, we started arguing that markets were ahead of themselves. Equities have since climbed another 10% and subsequently pulled back 5%.1 So where are markets heading from here?

Upside and downside risks appear fairly well balanced. The bull case: 1) The Fed is easing aggressively. 2) More fiscal stimulus is likely. 3) The infection rate is falling and test capabilities are rising. 4) We expect better or at least less bad economic data from here. 5) Investors have few alternatives to stocks. And the bear case: 1) The magnitude of economic damage will take years to fix. 2) More earnings disappointments are likely. 3) Valuations are less attractive than they were three months ago. 4) An additional surge in infections is very possible. 5) Bear markets associated with a recession usually last longer than four weeks.

Over the near-term, we are concerned that investors may be looking past this list of negatives, and we think stocks could be vulnerable to additional bad news. As such, we think additional corrective action is probably likely. Over the long-term, however, we believe the positives will outweigh the negatives. Stock prices could gain ground when we have more clarity around the state of the economy. At that point, we expect investors will begin to price in prospects for a sharper economic recovery at the same time the Fed remains committed to promoting growth. This could cause a rotation away from the more defensive areas of the market that have been outperforming and into more economically sensitive cyclical areas.

Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.

1 Source: Bloomberg, Morningstar and FactSet
2 Source: Census Bureau
3 Source: Bank of America Merrill Lynch Research

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