Equity investors looked through a reacceleration in new coronavirus cases, focusing instead on positive vaccine developments, rising global stimulus, improving economic metrics, and better-than-expected calendar second-quarter corporate earnings to propel stocks higher in July. The equity rally broadened versus June, with ten of the eleven S&P 500 Index sectors producing positive returns for the month. Gains in growth stocks continued to outpace those of value markedly across the market capitalization spectrum. Real-time measures of economic activity have plateaued in recent weeks as the reacceleration in new coronavirus infections forced some states to backtrack on reopening. Post a snapback in economic activity in May and June, the economy is now operating roughly 35 percent below January 2020 levels according to data from Bloomberg. Although typical precursors of economic growth, such as money supply and financial conditions, have improved dramatically recently, the coronavirus continues to hold the economy hostage. As a result, the federal government will need to inject more stimulus to support consumers and businesses, leading to added Congressional battles and lingering policy uncertainty, not the least of which is surging debt levels.
The stock market is in a state of uneasy hopefulness – that is, equity investors are betting the pandemic, aided by the release of the vaccine in early 2021, will be contained within the intermediate term, and that massive global stimulus will ultimately propel economic growth beyond mere normalized levels. Sheer momentum and a fear of missing out have also driven equity market gains. As a result, stock valuations have risen to historically high levels, albeit stated P/E multiples are based on relatively depressed sell-side earnings forecasts. We remain constructive on U.S. equities over the intermediate and long term. Still, euphoric investor sentiment and a multitude of uncertainties/risks (e.g., pandemic, pace of recovery, U.S.-China tensions, elections, etc.), will likely keep stocks volatile and vulnerable to pullbacks on evolving news. After an initial bounce, we anticipate the economic recovery will be choppy, with stocks following suit. We also believe participation in market gains will broaden beyond large capitalization technology stocks. Our investment focus remains on high-quality, fundamentally solid companies that can deliver above-average earnings growth, regardless of the economic backdrop. Our preferred sectors currently include technology and healthcare.
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