The Recent U.S. Market Upside Will Be Tested By The Earnings Season

The Market Is In The Upside Mode Because Of Monetary Stimulus

This week was very successful for the U.S. stock market, and S&P 500 gained 12% in just four days. The total rebound performance is even more remarkable since the index gained 27% from lows that were reached on March 23, 2020.

At this point, S&P 500 has recovered half of the losses that it sustained during the current coronavirus crisis, and settled at levels of June 2019.

The key driver of the current upside was the unprecedented stimulus announced by central banks and governments all over the world. The latest news on this front include Fed’s $2.3 trillion program to help local governments and small and mid-sized business, and the EU 0.5 trillion euro plan to support the bloc’s economies.

At the same time, the economic news was shocking. U.S. Initial Jobless Claims reports showed that almost 17 million of Americans filed for unemployment benefits in just three weeks. This is an unprecedented loss of jobs and, certainly, there’s more to come.

While the current programs announced by the government will support jobless people in the near term, the key question is how much permanent damage was done by the current crisis.

Can Monetary Stimulus Be Unlimited?

Governments and central banks all over the world have done a good job to keep financial markets alive during the acute phase of the crisis. However, there’s only so much debt that any country can take even in the zero interest rate environment.

In this light, it’s hard to expect that the markets will be supported by additional stimulus news on a weekly basis. Therefore, they will ultimately find themselves in a situation when they will have to face the negative economic data without such support.

The next week marks the beginning of the active phase of the earnings season, and the market will listen carefully to what the company executives have to say during conference calls with investors.

Previously, the U.S. stock market was able to easily shrug off the negative economic data thanks to huge monetary stimulus and hopes that virus containment measures will be lifted soon.

However, the companies’ valuations will be put to a test with new guidance announcements (in some cases, company executives will refrain from providing any guidance at all).

It remains to be seen whether stocks will be able to gain even more ground despite the negative economic news after a spectacular rebound from lows. At this point, the risk is likely skewed to the downside, although speculative activity on hopes of never-ending stimulus may still provide more support for U.S. equities.