Sanford Bernstein looks at possible explanations for the market recovery.

1. Investors could be looking to the end of lockdown as we pass the point of maximum uncertainty about the economic impact. The sobering point is that in none of these scenarios can the market be said to be cheap in any sense (see table below).

2. Another possible explanation for the rally is simply that it is a function of the policy response, for example the expansion of the Fed’s balance sheet. That would imply that investors are happy for valuations to have detached from the earnings cycle for an extended time.

3. A third possibility is that it is a case of “TINA” – there is no alternative to buying risk assets, although equity buying in the last few weeks is no higher than the pre-viral run-rate.

Bottom line is we are facing the deepest recession and highest unemployment rate since the war and we think it unlikely that we get away with “only” a 17% fall in the S&P.

Chart: earnings growth and PE implied by lock-down scenarios

For the anatomy of the bounce we outlined over the weekend (getting close to the “typical” bounce Fibo)