Stock markets have disconnected from company earnings by the biggest amount since 1998, according to research by investment bank Credit Suisse.
Even so, the Swiss bank says it is still bullish on equities over the long-term with the broadening of the recent rally potentially adding another boost.
After more strong gains overnight all three major US indices – Dow Jones, Nasdaq and the S&P 500 – have now recovered the ground lost due to the coronavirus-inspired slump.
Dow Jones has risen 48% since its low this year on 23 March for instance, while over the same period the FTSE100 has gained 28% from its low.
Yesterday’s rise in the US coincided with America officially being declared in recession by the National Bureau of Economic Research.
Economic statistics from the Eurozone have been equally gloomy with latest forecasts from the French central bank suggesting a 10.3% drop in GDP this year to be followed by a 6.9% rebound in 2021.
But equity markets look eighteen months ahead and not what is happening currently, says the Swiss bank
During the financial crash of 2009 equities had rallied nearly 60% even before trailing earnings had bottomed out, it said.
As well as this recovery, the extra return potential from holding equities (equity risk premium) is also still in stock markets’ favour added the bank.
On its estimates, a fair value for S&P 500 is around 3,500 at the end of 2021 compared to 3,232 yesterday.
The flow of funds into equities relative to bonds has never held up as well as currently, Credit Suisse adds, while excess liquidity remains highly supportive.
Dividend futures imply a lot of pessimism but if the recent rally extends from growth into value stocks, this might add another boost.
“We had the growth to value rotation in ‘03 and ‘09, with the market rising on both occasions – by 23% and 36%, respectively.”