Highlights
• Over the last several weeks, investors have been bidding up stock prices on hopes for stronger economic data and prospects for a coronavirus vaccine.
• Rising infection rates, however, will likely blunt the pace of the recovery, which could create more headwinds for equities.
• As such, we think stocks will continue to churn and move sideways over the next several months.

Stock prices rose for a third consecutive week, bringing prices back to where they were in early June.1​ Investors largely shrugged off news of growing coronavirus cases in many areas of the U.S. and world and looked past possibilities of renewed economic shutdowns. Instead, markets focused on some better-than-expected economic and earnings results and hopes over an eventual vaccine. Value and cyclical areas of the market outperformed growth and momentum, as the industrials, materials and health care sectors won out over consumer discretionary and technology.1​

Weekly Top Themes
1. Growing virus cases are likely to complicate economic reopening plans, but we don’t expect massive shutdowns. As the virus flares up in areas of the U.S. and elsewhere in the world, we think economic activity is likely to slow in some places. But we don’t expect widespread renewed shutdowns. For one, the health care system is better equipped to handle the virus than it was in the spring. Additionally, both policymakers and individuals are committed to reopening the economy, both for good and ill. We don’t expect any new shutdowns to spark a new equity bear market, but we do think they will slow the pace of the current economic recovery.

2. Consumer sentiment is falling. The University of Michigan’s Index of Consumer Sentiment fell from 78.1 in June to a worse-than-expected 73.2 in July. This suggests consumer spending is likely to slow, which is bad news for the economy (and for President Trump’s reelection chances) but good news for prospects for an additional fiscal stimulus package.

3. Earnings have been a bit less horrible than expected. With 15% of S&P 500 companies reporting second quarter results, earnings are on track to be down 43% year-over-year.2

4. The banking sector remains under pressure. Banks are continuing to raise their credit loss provisions, as the risk of bankruptcy among their borrowers is rising. We don’t see this changing until we have more clear evidence of infections being contained.

5. Jobs growth should continue, but slowly and unevenly. We expect the unemployment rate to fall over the next 18 months, but also believe it will be higher than pre-crisis levels at the end of 2021.

6. U.S. political uncertainty is growing. It is looking increasingly likely that Joe Biden will win the presidency. The growing possibility of a Democratic Senate could result in market-unfriendly tax and regulatory changes.

7. We could be at the cusp of a change in global stock market leadership. Over the second half of 2020, we expect the U.S. dollar to fall and non-U.S. stocks to start outperforming on a relative basis.

We Expect Stocks To Remain Range-Bound For Now
Investors are increasingly looking past the rise in coronavirus infections and are instead focusing on prospects for better economic activity in the future and hopes of progress on treatments and vaccines. This is in sharp contrast to behavior back in March and April, as it appears investors are more willing to ride out uneven economic data. Confidence could start to fall if the rising infection rate continues and if the trend of positive economic data reverses. We are also concerned over the lack of ready catalysts that could make the current economic recovery self-sustaining. A rebound in global trade levels would be the most obvious candidate, but that seems quite unlikely in the current geopolitical environment.

Stocks have been rallying in recent weeks, and have essentially returned to the levels of six weeks ago. Looking ahead, we expect markets to remain relatively volatile and choppy, as we expect a higher level of economic disappointments until the coronavirus infection rate diminishes. On the positive side, however, stocks remain buoyed by extremely accommodative monetary policy and we expect more fiscal stimulus in the months ahead.

Evidence of a successful vaccine could trigger a renewed stock market rally (as demonstrated by last week’s jump in prices over positive signals on that front). But it is still too early to pin our hopes on such an event, as vaccine trials are still in early stages. Additionally, other sources of possible market turbulence could emerge in the coming months, chiefly around the U.S. elections.

In sum, we remain constructive toward stocks over the long term, but think equity markets are more vulnerable to disappointments over the short term. This is a recipe for continued churning activity over the next couple of months.

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

1 Source: Bloomberg, Morningstar and FactSet
2 Source: Credit Suisse