Evercore Leans Bullish With Five Reasons Stocks Didn’t Tank
The apparent dichotomy between bad news on the economy and resilience in the stock market isn’t such a mystery for the strategists at Evercore ISI, who remain unswayed by dark warnings from Wall Streetheavyweights.
Deepening U.S.-China tensions, worries over fiscal authorities stepping off the accelerator, a surge in unemployment and fears about a second wave of coronavirus infections along with other downbeat headlines all make it notable that the S&P 500 Index only fell 2.3% last week, Evercore strategist Dennis DeBusschere wrote in a note Sunday. The key counterpoint has been moves to reopen businesses around the world.
“Human ingenuity will allow for a gradual resumption of economic activity,” for all the negative recent developments, DeBusschere wrote. “We lean toward positive outcomes.”
DeBusschere listed several reasons for the staying power of the rebound in stocks from a March low:
- S&P 500 valuation isn’t extreme; stocks look cheap on the basis of price-to-cashflow and price-to-cash return — which aims to show the ability of a company to use its capital to generate cash flow — even if not by price-to-earnings. “Unlike other periods, the valuation measure you choose could severely skew your view of market-risk reward”
- Estimated Covid-19 transmission rates in the U.S. are declining, new case growth is trending lower across Europe and Asia, and there are “few signs of virus resurgence”
- Some experts have become more positive on vaccines and the potential for them to start arriving later this year; “people trading on cluster headlines may be missing the progress on this front”
- Evercore analyst Josh Schimmer is “confident the vaccines can arrive by year-end — if we need them,” he wrote in a note Saturday
DeBusschere sees credit spreads between AAA grades and the top tier of junk bonds as a key metric going forward, along with volatility in Treasuries, along with health metrics such as Covid-19 case growth and estimated transmission rates.
— With assistance by Rita Nazareth
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