Stocks may recede to coronavirus lows as rally loses traction
Calls for a selloff have picked up over the past few weeks
Farvahar Partners CEO and founder Omeed Malik discusses the American economy's performance during the coronavirus pandemic.
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The S&P 500’s rally has run its course and a retest of the March lows cannot be ruled out, according to one Wall Street bank.
The benchmark index may drop as much as 23 percent to 2,237 as gains in a small minority of stocks prove insufficient to sustain a heady climb that belied the effects of the coronavirus shutdown on a wide swath of U.S. businesses.
Five companies – Facebook, Amazon, Apple, Microsoft and Google – make up 20 percent of the S&P, the highest concentration in over 30 years, according to the investment bank Goldman Sachs.
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The S&P 500 has rallied 29 percent off its March low, suggesting the shortest recession in history or that the Fed is buying stocks – both of which seem “unlikely for now,” according to Foster Tsai, equity-linked analyst at Bank of America. He said history suggests the S&P 500 could “rally near 3,000 before rolling over and returning to lows.”
Earnings forecasts from equity strategists at Bank of America show the S&P 500’s price-to-earnings ratio is 25.3, a level only seen in 2000 at the height of the dotcom bubble.
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Calls for a selloff have picked up over the past few weeks as breadth, a key signal of stock-market strength that measures the number of stocks participating in a rally, has indicated an underlying fragility.
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As of Sunday, the S&P 500 was trading 14 percent below its record high while the median component was 23 percent below its own peak. The 9 percentage point gap was among the highest since 1980, wrote David Kostin, chief U.S. equity strategist at Goldman Sachs.
He said narrow market breadth is “always resolved the same way” – with market leaders catching down -- rather than up -- to their peers.
Morgan Stanley equity strategist Mike Wilson believes that while a correction is “overdue,” the market will ultimately grind higher as ”unlimited central bank support” and “unprecedented fiscal stimulus” lead to a faster-than-anticipated jump in inflation expectations.
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He says a 10 percent drawdown is possible and that the 2,650 area in the S&P 500 will be “vigorously defended.” Wilson has a base-case S&P 500 target of 3,000 for yearend 2020.