Stocks are priced for an unrealistic perfection
US stocks are looking through this year’s earnings collapse in the expectation that 2021 is a more realistic picture of underlying economic activity. We agree, but we expect 2021 earnings will be well below consensus expectations. The COVID-19 crisis will not turn into a benign market environment next year.
And while many investors have bought risk with abandon after the Fed spread a QE-safety-net across most US assets, we see the logical end-point of Fed policy as a long-run sell signal as misallocation of capital means potential growth will decline and with it expected returns.