FXStreet notes that after hitting a record high of 3380 on 19 February, then plunging 34% to a pandemic-induced low of 2237 on Mar 23, the S&P 500 index took just five months to make a round trip and set a new record. Nevertheless, the recovery stage of this new business cycle has not transitioned to an expansion phase for three reasons explained by Lisa Shalett from Morgan Stanley.

“S&P 500 gains are concentrated in a handful of stocks. The five largest names, mostly tech and social media companies, now comprise a historic 25% of the index. That group is up 30% year to date, but the median stock is down 7%. The result is an index that is not only expensive – the forward price-earnings (P/E) ratio is 23, near the extremes of the 1999 tech bubble – but also very top-heavy. Lower interest rates may seem to justify high valuations, but if inflation picks up as the recovery progresses, those rates will likely rise and create market headwinds.”

“The market seems disconnected from the economy. While markets tend to anticipate the future, expectations may be getting unrealistic. We see lots of data supporting a V-shaped recovery but the recession isn’t over. Unemployment remains over 10%; even a 20% jump in GDP growth in the third quarter would return the economy to a level still 9% below where it stood in January. We don’t expect GDP to fully recover until the second quarter of next year and doubt that corporate profits will significantly outpace that rate.”

“Investors seem overly complacent about potential risks. Individual investors seem somewhat subdued, but institutional investors have moved to max-bullish sentiment, with put/call ratios at seven-year lows (a low number indicates investors expect stocks to rise). Such complacency seems odd, given high uncertainty about the next phase of fiscal stimulus. Although the outlook may have improved on COVID-19 infection rates and a vaccine, the pandemic’s trajectory remains in doubt. The US presidential election, where possible outcomes are very much in flux, represents another major unknown for markets.”

“We expect markets to be mostly range-bound over the next three months of uncertainty and think small caps, value-style and cyclical stocks will return to favor. Meantime, watch market breadth, valuations and economic fundamentals for signs that the market is reaching new extremes.”

U.S. stock-index futures traded mixed on Tuesday, with Nasdaq futures being flat and S&P 500 futures surging, as upbeat comments by the senior Chinese and U.S. trade officials on their latest trade talks solidified positive sentiment, which was boosted on Monday by hopes for a near-term coronavirus vaccine breakthrough.

Global Stocks:

(company / ticker / price / change ($/%) / volume)

Apple (AAPL) target raised to $530 from $470 at Cowen

Facebook (FB) target raised to $330 from $242 at UBS

Starbucks (SBUX) upgraded to Buy from Hold at Stifel; target $90

FXStreet notes that S&P 500 has reached all-time high cementing that a new bull market has been underway since the March low. This was the fifth time in history that the market hit an all-time high while the economy was still in a recession. Market breadth has been underwhelming while the concentration of the largest five stocks remains a risk, Lizz Ann Sonders from Charles Schwab reports.

“The stock market rally off the March 23 low is now ‘officially’ a new bull market, courtesy of the S&P 500 having hit a new all-time high. It was the fastest recovery in history to a new high following a decline of at least 30% historically (the S&P was down 34% from February 19 to March 23; also the fastest move in history from an all-time high to bear market territory).”

“The dominance of the five largest stocks in the S&P 500 have received much investor attention (and buying pressure). In equal-weighted terms, they represent 1% of the S&P 500; but in cap-weighted terms, they now represent nearly their own quartile. This cycle’s dominance by the top five stocks is outsized relative to past cycles. Following the past three major bear market lows, the five largest stocks did not perform as well as they have today.”

“Concentration has its risks; particularly with regard to the relatively weak breadth statistics accompanying the March new all-time highs. The percentage of S&P 500 stocks above their 50-day and 200-day moving averages have rolled over in conjunction with the overall index hitting a new high. In addition, less than 10% of the S&P 500’s members are trading at a new 52-week high.”

“The recent all-time high marked the fifth time in history when the S&P 500 hit an all-time high while the economy was still officially in a NBER-defined recession. The prior four times were in January 1961, July 1980, November 1982 and February 1991. In all four cases, the NBER declared the recession as having concluded within the subsequent month.”

“I worry about the signs of froth in the market and among some behavioral measures of investor sentiment; not to mention traditional valuation metrics that are historically-stretched. This is not an environment in which greed should dominate investment decisions; but instead one for discipline around diversification and periodic rebalancing. Momentum can power the stock market beyond fundamental supports.”

Best Buy (BBY) reported Q2 FY 2020 earnings of $1.71 per share (versus $1.08 per share in Q2 FY 2019), beating analysts’ consensus estimate of $1.09 per share.

The company’s quarterly revenues amounted to $9.910 bln (+3.9% y/y), beating analysts’ consensus estimate of $9.794 bln.

BBY fell to $113.05 (-3.68%) in pre-market trading.

FXStreet notes that the S&P 500 has moved to a decisive new record high above 3394 for a move to the 3432/36 resistance. Despite the improvement in momentum, analysts at Credit Suisse continue to look for this to try and cap for a corrective phase. 

“S&P 500 has gapped higher to a conclusive new record high and a move to our ‘ideal’ objective of Fibonacci projection at 3432/36. With potential trend channel resistance just above at 3443 it is from here we continue to look for a correction lower to finally emerge.”

“Support moves to 3414/13 initially, with a break below 3400/3397 needed to ease the immediate upside bias, with support then seen at the uptrend from late June at 3382 today, with the 13-day exponential average at 3370. Only below the 3355/54 recent low though would see a (small) price top established to confirm a more important near-term peak, with support then seen next at 3326.”

“Should strength directly extend and a close above 3443 be posted this would suggest the trend has entered a more accelerated phase with resistance seen next at 3450/52, then 3466.”