Wall Street's Bubble

By Alex Eule |  Tuesday, June 2

In a Vacuum. Stocks have reached a new lockdown-era high. After rising 0.8% Tuesday, the S&P 500 closed at its highest level since March 4. It was only a few weeks before that when stocks hit their all-time high. The large-cap index is now just 9% off its Feb. 19 record. 

So how do investors keep pushing stocks higher, even as angry and frustrated Americans take to U.S. cities to protest police brutality, potentially delaying re-opening progress? Ultimately, Wall Street exists in a vacuum. And that has never been more obvious.

Here's how Barron's Al Root explains investors' cold-blooded calculations: 

That lack of reaction isn’t surprising in one regard: Wall Street filters most news through the lens of share prices. It’s a voting machine on the future of corporate profits.

Strategists, meanwhile, think  those profits may finally be on the upswing. Ed Yardeni and his team of economists are now calling a bottom in the Covid-19-related earnings crash:

S&P 500 forward earnings rose last week for a second week, after dropping every week since the week of March 5. We aren’t surprised since we’d been thinking that this might happen in June given how quickly and sharply consensus estimates have been slashed in recent weeks. The 2020 estimate is falling faster than the 2021 estimate, which is why forward earnings may be starting to bottom—i.e., the 2021 estimate gains more weight in the forward earnings calculation as that year approaches.

... Now, we are calling a bottom in forward earnings. If it continues to rise, as it has during the past two weeks, then it will have bottomed eight weeks after the market did so on March 23. That would be similar to the [global financial crisis] experience, when forward earnings bottomed nine weeks after the March 9, 2009 trough in the S&P 500’s index price.

Continued hopes around a Covid-19 vaccine are also feeding expectations for a profit rebound.  Dr. Anthony Fauci told a Wall Street Journal virtual conference today that "we are really optimistic we're going to be successful" with a coronavirus cure. He thinks multiple vaccines could all arrive "within a reasonable period of time."