The Stock Market’s Day of Reckoning Is Coming - Barron's

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It might not feel like it, but the S&P 500 index is flat over the past month. It ticked up 1.76% this past week, to close at 3185.04—less than five points away from its level on June 10. But that obscures plenty of volatility under the surface: The index has had larger daily moves than its overall monthly change in all but one trading session in the past month.

The Cboe Volatility Index, or VIX, has stubbornly remained close to 30 points, in the top 10% of historical readings. It’s a dynamic that Evercore ISI strategist Dennis DeBusschere calls a “violently flat” market. The coming month should be just as violent, but there’s a good chance it won’t be flat.

The Dow Jones Industrial Average rose 248 points, or 0.96%, this past week, to 26,075.30, while the unstoppable Nasdaq Composite rose 4.01%, to 10,617.44. The week was a microcosm of the past month’s market action, with stocks falling on days following record U.S. coronavirus cases and rising on less-bad days, including Friday’s gains on a positive incremental analysis of remdesivir data from Gilead Sciences (ticker: GILD). Through it all, tech shares continued to rise.

The long-tail implications of the coronavirus and its impact on the economy are significant and inherently unpredictable. Hence the violent daily market moves on what seems like at most incremental news. But the swings have been amplified by the vacuum of other factors to influence indexes and individual stocks over the past month. It has been a recipe for a volatile and sideways market in search of an overarching catalyst to determine its next long-term direction.

There’s a lot on investors’ calendars over the coming weeks and months. The days of nothing but the latest coronavirus or economic data swinging the entire market in one direction or the other might be ending.

First is second-quarter earnings season, which ramps up this coming week. Analysts’ consensus is for a 12% year-over-year drop in revenue and a 44% plunge in earnings for S&P 500 companies. But it won’t be that simple.

For starters, the second quarter was one without any historical precedent, and it’s fair to say that analysts had to plug in more than their usual dollop of assumptions when modeling out the period. Add in the fact that practically every U.S. economic data release over the past month has surprised to the upside, and perhaps earnings could do the same. As for whether or not that’s currently priced in by the market—or if investors will even care about results from such an outlier of a quarter—is anyone’s guess.

The bar is particularly high for booming tech companies. Shares of firms exposed to remote working, cloud software, and other tech trends have vastly outperformed the market in 2020. It’s time for them to live up to the hype and show the strength in their second-quarter results. For old-economy names, investors may judge them more on their financial guidance or any management commentary about their return to normal in the future, not what happened in the second quarter.

“Everybody pretty much got a free pass last earnings season in terms of sharing guidance,” says TD Ameritrade strategist JJ Kinahan. “I think people will demand more this time, at least some color on plans and expectations until the end of the year, if not concrete numbers.”

Either way, it’s certain to be an earnings season full of surprises, violent reactions, and challenged assumptions.

Also coming in the next couple of weeks should be greater clarity on the direction of the coronavirus outbreaks in several Southern and Southwestern U.S. states. Selective rollbacks of reopening measures like ordering bars and restaurants to shut down will have had a few weeks to work their way through, and lagging case and hospitalization numbers should begin to show their effect—or not. Either outcome has implications for the path and speed of the economic recovery, and thereby the market.

So does the next fiscal stimulus package out of Congress. As things currently stand, funding for enhanced unemployment benefits and the small-business Paycheck Protection Program expire on July 31 and Aug. 8, respectively. That has some concerned about an impending “income cliff,” in which millions of U.S. consumers’ earnings see a sharp and sudden drop.

Speaking on Thursday, Treasury Secretary Steven Mnuchin said that the Trump administration and Senate leadership are discussing a new bill and singled out a period between July 20 and July 31 for passing it, pending an agreement with Congressional Democrats. That could be another potential hiccup or boost for the market in the next few weeks.

Once we’re through all that, we enter the thick of election season. The goings-on will garner plenty of attention, even if Kanye doesn’t opt to formally enter the race.

For much of June and early July, two sane and rational investors could have looked at the coronavirus outbreaks, equity valuations, and the prospect for the U.S. economy and come up with opposite—and equally valid—conclusions. Over the coming weeks, greater long-term clarity on one or more of those factors should emerge. Volatility will persist, as each factor could materially alter the prospects for the market. But stocks should at least gain some greater overall sense of direction.

Read the rest of The Trader:Cash Flow Matters More Than Ever. Watch These Companies.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com

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