In case you need a refresher course, it’s all stimulus these days
Much has been made about the divergence between the path of the US (and global) economy and that of the stock and corporate bond markets. Even while economic and earnings growth is historically weak and remains under severe pressure from a rapidly spreading virus, major stock market indices have rallied and are at or near all-time highs. Market valuations based on forecasted earnings over the next 12 months have clearly risen sharply.
Global risk appetite measures slipping recently
Stock prices globally have remained unusually buoyant in the face of well-known health and financial risks. Thanks largely to aggressive global monetary and fiscal stimulus starting in March and still going on (though arguably fading), risk appetite jumped dramatically following the severe but relatively brief sell-off from late February to late March.
Most recently, however, several metrics of global risk appetite that we track have either plateaued or weakened. This coincides with a reduction in the pace of central bank activity and growing uncertainty about further fiscal stimulus programs, especially in the US. It also coincides with the recent turn higher in the growth of COVID-19 cases in the US and globally.
Earnings uncertainty still extremely high going into Q2 reporting season
As Q2 earnings season gets underway, the level of uncertainty about future earnings among analysts remains extremely high. Despite somewhat calmer equity market activity recently, our data shows that the level of disagreement among analysts regarding earnings over the next 12 months (NTM) is still well above the highest levels reached in the Great Financial Crisis (2008-09) period (chart below).