A widely held view in the market is that equities are due for a sharp correction, given the amount of underlying risks, such as the high debt levels, the possibility of a new wave of infections, and the rising tensions between the US and China.
While we accept that these are important risks, we remain, on balance, optimistic. The S&P 500 rally since late March was characterised by a very high dispersion, the highest since the tech bubble burst, in 2001: in May, the top quintile of industries in the SnP essentially recovered all the losses.
This pattern is consistent with the observation that, for the top performing industries (which include internet, biotech, pharma, software and entertainment), earnings and overall demand have been strong, and will likely remain strong in the years ahead. Meanwhile, in the bottom quintile, where industries have been particularly hurt by the pandemic, prices are still around 34% below the peak.
We are not convinced by the argument that equities must trade lower, especially if we consider that interest rates are significantly lower than they were in February. While it is hard to predict the exact path of equity prices, we think US equities may continue to follow the ‘three-steps-forward-one-step-back’ price pattern.
The above article is an extract from our regular fund manager commentaries.
To subscribe to our fund manager commentaries, please email email@example.com
 This was underscored by the ECB, in a remarks by Executive Board Member Fabio Panetta on July 7th, 2020, ‘Unleashing the euro’s untapped potential at global level’
None of the contents of this document should be understood as constituting research on investment matters, or as a recommendations, advice or suggestions, implicit or explicit, with respect to an investment strategy involving the financial instruments discussed, or the issuers of the financial instruments, nor as a solicitation or offer, nor as consulting on investment matters, of a legal, fiscal, or other nature. All the companies of the Intesa Sanpaolo Group, its administrators, representatives, or employees, decline any responsibility (fault-based or otherwise) deriving from indirect damages potentially caused by the use of this communication or its contents, or in any case deriving in relation to this document, nor may they be consequently held liable for any of the above. The information provided and the opinions contained in this document are based on sources considered reliable and in good faith. However no declaration or guarantee is offered by Eurizon SLJ Capital Limited, explicitly or implicitly, on the accuracy, exhaustiveness and correctness of the information, and there is no guarantee that results, or any other future events, will be compatible with the opinions, forecasts, or estimates contained herein.
Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
Our written research products aim to provide unique and orthogonal insights on key global economic and policy issues in a timely fashion.