This year more than ever, the outlook for the U.S. stocks in the second half is anyone’s guess. After hitting bottom on March 23, down 34% from a record high reached a month earlier, then recovering 95% of those losses by June 8, the S&P 500 remains mired in choppy trading.
Recently, strong retail sales boosted prices, but news of rising COVID-19 infections and hospitalizations in states that have aggressively eased restrictions tugged stocks in the opposite direction.
“The warp speed nature of the pandemic and economic crisis helps explain the equally warp speed nature of the stock market’s behavior,” writes Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. in her midyear outlook.
Sonders expects to get more clarity on the depth of the economic downturn when second-quarter earnings season begins early next month and the second-quarter GDP report is released near the end of July.
“Second quarter earnings season may be an eye-opener — not just what’s reported for earnings in the quarter but what companies say about the second half outlooks,” writes Sonders. About one-third of companies in the S&P 500 have stopped providing earnings per share guidance this year because of the pandemic.
In the meantime, the outlook for the second quarter is dire. The Atlantic Fed’s GDPNow forecasting model estimates a 45.5% annualized decline in second-quarter GDP; Wall Street forecasters see a 20% to 40% decline.
(Related: U.S. Recession Began in February: NBER)
“This is not a normal recession,” writes Sonders. She explains that in normal recessions, as government debt rises, private-sector debt declines but that hasn’t been the case this year. Both are rising, with non-financial corporate debt, already at a record high before the pandemic, continuing to grow.