Financial markets have recovered the majority of the losses suffered from the crash caused by the COVID-19 pandemic.
The economy has recovered as well, though concerns are mounting that rising case counts could stall this still-fragile rebound.
But credit strategists at Bank of America Global Research wrote in an email this week there are three apparent reasons for investors to be bullish for another few months.
“First, the united states is detecting a whole lot of new Covid-19 situations, which lowers the probability/severity of any second wave of infections,” BofA strategists write.
“Second, the economic surprise index displays we are in the stage where consensus underestimates the rebound in data. Third, we think the 2Q20 corporate earnings reporting routine shall mirror that – horrific data, but meaningful much better than feared and assistance to get worked up about. Of course, according to the industry and individual situation.”
We believe there are just two reasons instead of three – testing and expectations.
On the testing aspect, BofA notes the widely-cited IHME model – which has been leaned on heavily by the White House but has faced concerns on its precision – suggests we are getting around 40% of likely infections in the U.S. with testing. The April peak infections were likely to capture significantly less than 10% of the real number of infections.
The firm’s case is that as the current increase in cases isn’t right, we do likely have a good handle on the extent of the COVID outbreak we’re currently experiencing: a silver lining at best, but a possible way to obtain upside surprises throughout the market still.
The last two pillars of BofA’s case for bullishness are generally continuations of what has underpinned the rally we’ve observed in marketplaces during the previous 90 days.
“Citi’s economic surprise index, which was at a record low as late as April 30th, is now by far and away the highest on record,” BofA writes. “Of course, that should come to an end eventually — but so far it has not.” Citi’s index measures whether financial data can be found in better or worse than expectations.
As we’ve covered before, financial markets are primarily worried about whether things are getting better or worse. And when it involves economic data, expectations are yet negative.
And these economic surprises, for Bank of America, start the possibility that analysts building forecasts for corporate income in the next quarter are getting too conservative. “Clearly investors be prepared to see horrific numbers general – but why would the much better than expected economic end result not also flow to at least much better than feared corporate earnings?” the company asks.
“At least companies should be wanting to guide the positive trends they are viewing for 2H.”
Relating to data from FactSet, a record-low quantity of firms in the S&P 500 have offered guidance intended for the second quarter. A lot more than 180 businesses have withdrawn guidance up to now this year.
Therefore if the first widespread corporate pattern we saw in the springtime was companies pulling their assistance amid pandemic uncertainty, the next half of the year might see companies recreate forecasts.
Something you’d only be prepared to see happen in the event that the news is good.