July 28, 2020
Our base case outlook remains that we are in a bull market that kicked off in March. One that became stretched to the upside in early June and led to the choppy environment since then. We acknowledge that the range of potential outcomes is unusually wide. However, our outlook is supported by a weight-of-the evidence approach that includes technical, economic and fundamental trends.

Technical Trends

  • Bull markets tend to begin after pessimism and indiscriminate selling reach a crescendo. This is consistent with very low investor expectations, which sets the stage for positive surprises. The extreme selling and negative investor sentiment readings seen around the March low is consistent with major market bottoms: 78% of S&P 500 stocks made 52-week lows then, the highest since October 2008. Additionally, equity mutual and exchange traded fund outflows reached near record levels.
  • The market’s sharp rebound since March is also consistent insofar as the first part of bull markets tends to be sharpest. The current bull market is on par with the two strongest bull markets—1982 & 2009—of the past seventy years. That said, it is also typical for stocks to see a moderation of gains after the initial thrust off the bottom.
  • Three separate technical indicators that measure price momentum and market participation triggered buy signals since late May; each has historically been followed by positive 12-month returns more than 90% of the time. These signals have been associated with bull market phases and tend not to occur in bear markets.
  • Strong quarterly market returns, such as what was seen in the second quarter of this year, have typically been associated with positive future returns: Nine of the 10 best quarterly return periods since 1950 were followed by a higher level in the S&P 500 12-months later. This included robust quarterly gains early into the 1974, 1982, 2003, and 2009 bull markets.
  • The average bull market since the mid-1950s has lasted over five years versus only four months currently.
  • Even accounting for the rebound, the S&P 500 is still 10% below its long-term trend.

Economic Trends

  • Our base case remains that this may be one of the sharpest but also one of the shortest US recessions in history. A recession technically ends when Gross Domestic Product (GDP) reaches a trough. The path to recapture the former peak in GDP will take time. However, we now appear to be in the recovery phase, albeit one that is uneven and expected to continue to see fits and starts.
  • Stocks, which tend to look ahead even while current data remains bleak, have bottomed an average of five months before the end of recession. This lines up well with the March stock market low.
  • Similarly, following all 12 quarters where the US economy fell at an annualized rate of 4% or more since the quarterly series began in 1947—which occurred in the first quarter and is estimated for the second quarter of 2020—stocks were higher a year later.
  • The average economic expansion has lasted over five years (similar to the average length of bull markets). Stocks have risen 85% of the time during expansionary periods.
  • A large increase in monetary stimulus and liquidity is often associated with new bull markets, and we are currently seeing unprecedented global stimulus.

Fundamental Trends

  • Perhaps one of the strongest arguments against this being a new bull market is elevated absolute valuations. The S&P 500’s forward price-to-earnings ratio of 22x is at a historical extreme.
  • However, valuations appear more reasonable in the context of massive monetary support, low inflation, very low bond yields and the lack of compelling investment alternatives to stocks. Earnings trends are also improving.
  • Since the end of 2019, the 10-year US Treasury yield has moved down from close to 2.0% to the current level of 0.6%. Thus, the S&P 500’s dividend yield advantage relative to the 10-year US Treasury yield is hovering at the highest level since the 1950s.
  • Even with depressed earnings, the equity risk premium (ERP)—which compares the market’s earnings yield to interest rates—suggests stocks remain attractive on a relative basis. At the current level above 300 basis points, the ERP is in a tranche that has been associated with the highest 12-month equity returns relative to fixed income (chart below).
  • The worst of the earnings reductions appear to be behind us. After the coronavirus shock, the S&P 500’s forward 12-month earnings estimates were cut by 14% and 20%, on a one- and three-month basis, respectively. This is on par with what occurred at the worst point of the financial crisis but appears to have overshot to the downside.
  • The S&P 500’s forward 12-month earnings estimates stabilized in early May and have gradually risen since then. The percentage of companies exceeding earnings estimates early into the current reporting season is at 80%, the highest level in more than 15 years (even while earnings growth is expected to be the worst since the fourth quarter of 2008).


Even in normal times, we have always believed it is best to approach a market outlook with a heavy dose of respect and humility. There are plenty of risks, there always are, though the current backdrop is magnified due to the pandemic. Indeed, the path of the coronavirus remains uncertain, the US election race is heating up and will likely inject volatility into the market, while US-China tensions are rising. Moreover, the US and global economies continue to move on an uneven path forward and there are risks to earnings if COVID-19 cases continue to climb and if progress on vaccines and therapeutics disappoints.

Bottom Line

It may seem illogical given the perceived disconnect between the economy and the stock market, but our weight-of-the-evidence approach suggests we are in a bull market and perhaps in somewhat of an early stage. We certainly expect more bumps along the way and risks remain. Thus, it is important to ensure that one is positioned with an asset allocation consistent with one’s goals and risk tolerance. With that in mind, until the evidence shifts, we advise investors to stick with the bull market trend and view periodic pullbacks as opportunities.


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