• Prior to Thursday’s sell-off, the S&P 500 had rallied nearly 45% in just 56 trading days since March 23. In doing so, it has raced through several stages of a typical market recovery. Initially led by consumer staples, as is traditional during recessions, market leaders have quickly changed places as the recovery has picked up steam.1     
  • Most recently, lower-quality stocks have taken the lead. For example, recent gainers include stocks of previously beaten-down energy companies along with cruise lines, casinos and retailers, whose returns have now far outpaced those of the broader index since March 23.1
  • Market participants appear to be betting on rapid economic and earnings recoveries for these companies. Despite last week’s positive jobs report, however, analysts’ earnings expectations as recently as May 31 remained deeply negative for the S&P this year while the Fed reiterated on Wednesday that the public health crisis poses considerable economic risks beyond just the short term.2   
  • The chart shows analysts’ calendar year earnings estimates for companies in the S&P 500 through the first five months of each year since 2005.2 2020’s estimated EPS decline of nearly 30% marks the S&P’s largest such decline since FactSet began tracking the annual bottom-up EPS estimate in 1996.2
  • Given the still highly uncertain macro environment combined with a deeply negative earnings picture, it seems fair for investors to question whether the market’s rise over the past 2+ months has come too far, too fast. Prudent investors may consider now a good time to insure their portfolios against further volatility.

1 Bloomberg Finance, L.P.
2 FactSet, “Record-high cuts to S&P 500 EPS estimates for CY 2020 to date,” https://bit.ly/2zkPyii.


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