The Reasons For The Rally

The Reasons For The Rally image

The State of the Market

To review, the overriding purpose of my oftentimes meandering morning market missive is to identify the primary drivers of the market action. As I've stated a time or two, my thinking is that if I can understand why Ms. Market is doing what she's doing on a day-to-day basis, I "shouldn't" get fooled by what happens in the longer-run.

So, while you can certainly file this in the Captain Obvious category, the current narrative in the market is stocks are continuing to discount the coming end of the COVID crisis via the broad distribution of two or three highly effective vaccines within the next six months. As such, analysts are busy putting a pencil to what the economy will look like when social distancing is no longer required, and, in turn the anticipated improvement to corporate earnings.

Below is a visual representation of what is happening to earnings estimates for the S&P 500. The light blue dashed line - or the line with the big drop on the chart - is the consensus estimate for operating earnings for calendar year 2020, while the orange dashed line represents estimates for 2021.

S&P 500 Operating EPS Projections By Calendar Year

(Click on image to enlarge)

Source: Ned Davis Research Group

As you can see on the chart, earnings estimates are "movin' on up" these days, which is a good thing for stock prices. And I will note that 2021 estimates are now above where 2019 ended. Therefore, from a simplistic point of view, it makes sense that stock prices are now higher than where they were at the end of 2019.

Yes, we can argue for days as to the appropriate price level for the indices relative to earnings over specific time frames. But at this point in time, the game is about the direction things are moving. Oh, and the expectation that there is likely to be significant pent up demand for all kinds of economic activity.

On that note, some analysts have gone so far as to say that the end of COVID could usher in this century's version of the "Roaring Twenties." One can hope, right?

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should ...

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