Although the S&P 500 is just shy of reaching a new record high, there are still a multitude of risks—such as a delay in the next round of coronavirus stimulus or a contested presidential election in November—which could threaten the stock market’s rebound and lead to a correction, Bank of America analysts say.
With U.S. lawmakers stuck in a “stalemate” and unable to agree on the next coronavirus stimulus bill, it could take weeks for an agreement to be reached, as the Senate has now adjourned until September.
“The lack of progress suggests Congress may have exhausted its resolve,” Bank of America says, adding that “only a market correction would wake policymakers from their dogmatic slumber.”
The second risk to markets is a House-selected president, analysts say: Concerns about expanded voting procedures, mail-in ballots or recounts in contested states could delay election results, adding more uncertainty for investors.
If that were to happen, “state officials could refuse to certify their electors,” meaning that the Constitution would require the House to select a president—but with one vote for each state delegation, “Republicans would likely hold the majority.”
The third factor that could impact markets, according to Bank of America, is a vaccine surprise: Six candidates are already in large-scale phase three trials, with some starting mass production.
But financial assets are not yet priced for a “return to normal” in 2021, the firm says, and “the risk worth considering is that an early vaccine could spark a significant tactical rotation out of deflationary defensives and into cyclical sectors.”
“While others are hedging the election, consider preparing for a third quarter buying opportunity,” Bank of America analysts said in their recent note.
Stocks have rebounded strongly from their coronavirus pandemic lows in March—although the U.S. economic recovery still has a long way to go. Many investors are already looking ahead to next year, betting that a vaccine will become widely available at some point in 2021. What’s more, second quarter corporate earnings have largely surprised to the upside, turning out better than investors had feared. Out of the 457 companies in the S&P 500 that have reported earnings to date, nearly 82% have beaten expectations. That’s the highest rate on record dating back to 1994, according to Refinitiv data, with just 16% of companies reporting below expectations. The S&P 500 spent much of this week flirting with a new all-time high, attempting to overtake its previous record of 3,386 set back in February.
If the S&P 500 does reach a new record high, it would be the index’s fastest recovery from a 30% drop in its history, according to data compiled by Ned Davis Research.