The S&P 500 is up a whopping 35% since its March 23 bottom after having fallen -34% from the February 19 top.
While the index is still down -10.5% from that February high, the rapid rebound represents one of the swiftest bear markets and market recoveries on record.
The rebound has been driven by optimism that the worst of the coronavirus crisis is behind us as the curve of new cases flattened out and economies began to reopen.
Still, as deaths from the coronavirus surpass 100,000 in the U.S. and experts warn of a resurgence in new cases as social distancing restrictions are eased, one has to wonder if the market’s march higher is sustainable.
“The market is getting pretty far ahead of itself,” said PNC Financial’s Amanda Agati. “The market is really pricing for perfection here.”
“It’s not the good kind of multiple expansion that we’re seeing here with the bottom dropping out of earnings especially for smaller cap names where leverage is basically sitting at all-time highs,” Agati said.
Recently, the market has been driven higher in part by positive news in coronavirus vaccine trials. But Agati argues that it’s premature to assume the coronavirus threat is moving to the back seat as the economy reopens, and a vaccine is likely further out than the market is anticipating.
Dr. Anthony Fauci, the top U.S. infectious disease expert, said this week that there’s a “good chance” a vaccine for COVID-19 could be deployed by November or December of this year.
Fauci did, however, warn that that’s contingent on not running into “unanticipated setbacks,” and that any timeline for a vaccine is “never a promise.”
Echoing that sentiment, Merck CEO Ken Frazier suggested in an interview with the Financial Times that a vaccine for the deadly virus may not be feasible within such a tight time frame, and that a more realistic timeline would be within 12 to 18 months.
Former FDA Commissioner Dr. Scott Gottlieb added that it’s unlikely we’ll see a vaccine before 2021. “I think we’ll have to have one more cycle of this virus in the fall, heading into winter, before we get to a vaccine,” Gottlieb said. “I really think a vaccine is probably a 2021 event, in terms of having wide availability of a vaccine for the general population.”
“The biggest risk and opportunity for the market comes down to the path of the virus and COVID-related data,” Agati said. “The worst case scenario for the market would be a second wave that would force us to shut things down again or it completely crushes the psyche of the consumer.”
And, according to Fauci, there’s “no doubt” we’ll see new waves of cases. “The virus is not going to disappear,” Fauci told The Washington Post. “It’s a highly transmissible virus. At any given time, it’s some place or another. As long as that’s the case, there’s a risk of resurgence.”
A risk the market doesn’t seem to be pricing in.
Also at question for Agati is the market’s breadth.
“COVID has really just for the most part accelerated a number of preexisting trends,” Agati added. “The narrow leadership beforehand [are] the same kind of four sectors we see lead now: communication services, staples, health care, and tech.”
Still, long term Agati is positive on the market’s prospects and isn’t convinced a sustainable rotation from growth stocks into value is taking place because the fundamental backdrop is so challenged.
According to Agati, there are no signs of a bottom forming in key value groups like energy, financials, the hard-hit retail sector, and parts of the industrials sector.
“It’s going to be a tough path here,” Agati concluded.