Equity markets have rebounded strongly since late-March, particularly in the U.S.. While technical conditions were deeply oversold, and the policy response to the pandemic and resulting economic shutdowns were unprecedented, stocks are now richly priced unless an historically powerful rebound in corporate earnings occurs in the next 18 months.
A just-published report updated our multi-asset recommendations, and concluded that it was prudent to hold a neutral weighting on equities. A tough slog looms in terms of restoring economic activity, which implies that corporate profits also face challenges in just returning to end-2019 levels. After a deep hole in profits in 2020, corporate prospects are brighter but still highly uncertain for 2021 and beyond. The budding setbacks in the important U.S. economy, as infection rates accelerate in many states, underscore that it will be a bumpy road ahead for equity prices as the earnings bar is now quite elevated.