The Good

  • Better Economic Data – Economic data, which lags the stock market, hit rock-bottom as expected during April and May, but some early signs of a recovery have begun to appear. Just look at the jobs data.
  • Better than Anticipated Earnings – EPS expectations will confirm the bottom and need to stabilize for multiple quarters. We have seen positive revisions to EPS expectation moving forward and the market is pricing in for earnings to fully recover by Q3 2021.
  • Government Intervention – The lesson learned from the Financial Crisis a decade ago was the bigger the better regarding policy response, and the response from Treasury Secretary Steve Mnuchin and Fed Chair Jay Powell was swift and historic.

The Bad:

  • Understanding EPS Impacts – We are nowhere near understanding COVID’s impact to overall EPS, near or long term, but ~$125 in EPS in 2020E EPS is where we currently stand. We could start to see this move higher, but any shutdowns put this at significant risk.
  • Inflation – The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higher-than-expected inflation tends to be a major headwinds to equity valuations.

The Ugly

  • Second Government Shutdown – A second government shutdown would decimate an already fragile economy. Small businesses are the backbone of this country and any derailment of a re-open could be catastrophic.
  • Taper Tantrum of Consumer – Fiscal support has been epically effective so far, but how do you taper it down? The $600 unemployment checks expire on 7/31 and the PPP later in the quarter. What happens when these programs roll off? Given that the consumer accounts for 71% of total GDP, what happens if Atlas shrugs?

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