Weekly Indicators for July 6 – 10 at Seeking Alpha

Stocks Generate Big Gains and Bigger Questions

NY Times – July 10

A powerful rally during drastically deteriorating economic conditions has left the market richly valued and facing great uncertainty.

Consider this opportunity: You can invest in a stock market that is greatly overvalued now but that could be only slightly overvalued next year if a lot of good things happen — during a time when a lot of bad things are happening.

Are you in?

This isn’t a thought experiment. It’s more or less the deal available to anyone buying stocks today, in the view of many analysts and fund managers. Judging from the market’s performance, it’s one that a lot of investors are taking.

The S&P 500 rose 20 percent in the second quarter. With the pandemic far from over. With earnings sinking. With public debt expanding. With unemployment at multidecade highs and much of the economy still barely able to get up off the deck.

A bounce in economic indicators and stocks was expected at some point, given how far both fell after the pandemic took hold. But skeptics warn that further progress on either score may be much harder to achieve. …

Another source of bullish sentiment is a willingness to ignore the severe downturn and look “across the valley,” as a newly popular phrase has it, evaluating investment prospects based on forecasts for a rosier post-pandemic environment.

The S&P 500 traded at the end of June at 24.4 times what analysts expect the companies in the index to earn this year, according to FactSet Research, compared with the average valuation of 18.8 times earnings over the last two decades. Using the forecast for 2021, which calls for a nearly 30 percent increase in earnings, the index traded at 19 times earnings.

That 2021 valuation would be barely more expensive than the two-decade average, but a forecast is just that. Earnings indeed may bounce back sharply from today’s levels, which have been depressed by the mandated shutdown of much of the economy, but there is no guarantee that they will. …

If the stock market is forming a bubble, it expanded mightily in the second quarter, to the benefit of fund owners. The average domestic stock fund rose an astounding 21.7 percent, according to Morningstar, led by portfolios focused on industrials, consumer cyclicals, natural resources and especially technology.

Holders of international stock funds had to make do with an average gain of 19.7 percent. Latin America and Asia specialists did the best.

Those performances contributed to the overvaluation that some analysts are warning about. Adding to the risk is the possibility that the valley in economic growth and earnings that bulls are looking across may be far wider than expected. …