The stock market is nearly back to pre-pandemic levels: Here's what experts will watch in June


Welcome to our monthly stock market outlook, where we preview what the pros will be monitoring and what everyday investors should know. Understanding what's happening in the market can make you a smarter investor and help inform your long-term strategy.

The U.S. stock market has continued to reemerge from the bear market that sent the S&P 500 tumbling nearly 34% earlier this year. While the pace of the rally cooled in May compared with April's historic run, this benchmark is now less than 10% below its all-time high in February.

The S&P 500 has technically risen the sufficient amount to be back in a bull market again, though market watchers have been reticent to make such a declaration yet

That's creating an interesting dynamic. Even as experts continue to tally the economic damage wrought by the coronavirus pandemic, the surge in the stock market reflects a bet by traders that the economy will recover quickly once all 50 states are fully reopened. 

Although the stock market is inching back to its pre-pandemic levels, analysts on Wall Street are forecasting that publicly traded companies will experience the worst quarters for profit since the Great Recession. And yet, traders seem keen to pay a premium for stocks, which may be an overly optimistic view right now, says Sam Stovall, U.S. equity strategist at CFRA Research.

The market is behaving "like an irresponsible teenager that is borrowing against future allowances it may have trouble repaying," Stovall says. Among the questions for the month of June is whether market participants will get information — be it from companies or economic reports — that justify the premiums to stock prices right now, he adds.

Here's what you need to know about the month ahead.

'Watching the virus very, very closely'

What's happening: New cases of people infected with Covid-19 have been reported in some states after they've begun to reopen, and that's why, for now, the focus remains on the virus itself, says Keith Buchanan, portfolio manager at Globalt. As a result, "we'll be watching the virus very, very closely from a public health standpoint."

Specifically, Buchanan is monitoring whether the spread of the virus accelerates again and what that means for the broader U.S. economy.

Why it matters: While economic data has been improving in recent weeks — like a decline in the number of people who still are unemployed — there's likely to continue to be uncertainty until a vaccine is available. "We're humble enough to realize that the worst of the public health crisis isn't behind us," Buchanan says. Until there's more clarity, the U.S. economy and the stock market may take longer to recover.

What it means for you: By the end of the month, Buchanan says, an "ideal" scenario would be that economic data has improved and the number of Covid-19 cases has decreased. For the foreseeable future, however, there's likely to be more bumpiness in the stock market until there are signs that the worst of the pandemic is over. That's why it's wise to maintain a long-term perspective and avoid making any emotionally driven decisions with your portfolio.

How to plan for stock market downturns

Video by Stephen Parkhurst

Is the market due for a wake-up call?

What's happening: Since the S&P 500 fell to its March low, this benchmark has jumped almost 37%. Prices have gone up while analysts estimate that earnings, or profit, for companies will fall. As a result, the price-to-earnings (P/E) ratio, which is used to measure the value of stocks, has increased and now is 40% higher than its average for the past 20 years, according to Stovall's calculations. Given the uncertainties about the coronavirus and likely economic recession, the current P/E ratio suggests stocks could be overvalued.

Why it matters: Starting in early July, companies will report quarter results for the second quarter during earnings season. So, in the weeks ahead, many companies will likely offer guidance about what they'll report — and traders may find that the fundamentals from companies don't support these high prices, Stovall says. For example, tech stocks have seen some of the biggest market gains in recent weeks — and Facebook, Amazon, and Netflix have even reached new all-time highs.

"Over the next month, I'll be paying very close attention to and wondering if this market will wake up and say, 'Can we justify such high P/E ratios?'" Stovall says. "We're waiting to see if the fundamentals support the price advance," and if the answer to that question is "no," then the stocks could head lower, he adds.

What it means for you: This could be yet another source of market turbulence in the near term, even if the long-term prospect for stock prices remains positive. Wall Street is looking for an economic recovery in the second half of the year, and more information from publicly traded companies could justify the market's early optimism, Stovall adds.

We're waiting to see if the fundamentals support the price advance.
Sam Stovall
U.S. equity strategist at CFRA Research

The bottom line

As with other aspects of daily life right now, there's reason to be uncertain about what will happen in the near term even if you're optimistic about the future. But that's not a good reason to shake up your investment strategy, and rather, the swiftness of the market's rebound is a good reminder of why it's important to ride out periods of turbulence.

Despite the recent surge in stock prices, the major benchmarks are still in bear market territory. Of the past 12 bear markets since World War II, on average, the downturns lasted about 14.5 months and it took another two years for the market to recover, for a total duration of about three years, according to analysis by CNBC and Goldman Sachs

Even so, strategists that CNBC surveyed are more optimistic. They now forecast that the S&P 500 will end the year about 9.5% lower than it began, based on their median estimate as of late-May. Back in April, they were forecasting declines of about 12% for the year.

Finally, Wharton School professor Jeremy Siegel recently told CNBC that new stock market highs this year is "a real possibility," even as the economic consequences from the coronavirus remain present. And famed investor Warren Buffett suggests that investors remain optimistic despite the pandemic because the U.S. economy has "always prevailed."

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