Most companies have reported second-quarter results and more often than not profits topped expectations despite the recession. One reason is that for many the expectations bar was set low, and understandably so as GDP tumbled.

Three months ago management and Wall Street were reluctant to be specific about the second quarter and beyond, given the virus and the uncertainties. To the extent they gave guidance most set the bar at a level they could beat even in a terrible economic environment. That is how it is turning out. Earnings for many have been well below year-ago levels, but not as bad as expected. The bar had been set low for the economy as well. For example, second-quarter GDP fell off a cliff, the worst quarter since the 1930s. But it was not as bad as analysts had expected. 

Forget valuations and earnings expectations for now. There are too many unknowables to put a fine point on short-term performance so the market is trading on momentum (Exhibit A, big-cap tech stocks). While the momentum stocks are off the charts in terms of valuations, that is not true for the market as a whole. Valuations are reasonable given record-low interest rates and the likely economic and profit outlook, which many are underestimating. 

When I speak to investors the overwhelming sentiment is negative. It’s far from the euphoria that we normally see at market tops. There are many naysayers among economists and analysts as well. They are reluctant to be optimistic. If they are somewhat negative or neutral then are pleasantly surprised later by strength, that would be okay. The media won't even bring it up. But there is a lot of downside if they predict good times that don't appear or worse if the opposite occurs. That would become a stain they may never shed. Many play it safe.

I write a lot about preferred stocks, and all the investment-grade issues I follow are back above par value. The selling in March was mindless, irrational, and extreme. They have made a full recovery. Even the below investment grade issues I follow continued to pay their dividends and have mostly recovered in price. 

While the market is currently up 50 percent from its March low there will be more upside as trillions of dollars and euros cranked out by central banks and governments find their way into financial assets. That is a key factor and should not be minimized. As they say, "just follow the money".