It took over 500 trading days for the S&P to return to its 1980 and 1987 precrisis peaks. The recoveries after the bursting of the tech bubble and the global financial crisis took much longer. Depending on the magnitude of the economic or financial market excess that triggers a crisis, there is typically an extensive lag between its onset and full recovery. While time heals all wounds, some take longer than others.

Will this recovery be different?

Every company has a point of solvency. Many were below that point heading into the crisis. The response to the pandemic—a government-imposed economic halt—pulled forward a recession that was probably inevitable. We aren’t yet sure that the pandemic is contained, and time will tell how elastic the real economy, revenues and ultimately free cash flow margins are. In the face of collapsing demand, companies have quickly added historical levels of debt. But borrowing to replace lost income, rather than investing for the future, weakens, not improves, balance sheets. Businesses are structurally weaker today than they were before the crisis. In our view, the combination of only a partial recovery in sales and increased financial leverage (despite low financing costs) decreases the probability that the S&P 500 will meet consensus earnings per share or free cash flow expectations.

Financial markets are a metaphorical voting machine. Throughout the course of the trading day, investors express their views on what free cash flow margins will be. Free cash flow is a function of scale and capacity. We fear investors’ recency bias has made this indisputable and indispensable point elusive.

Rob Almeida is a global investment strategist, and Erik Weisman is chief economist at MFS Investment Management.

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