A dichotomy between markets and reality
Two weeks ago, we reached the 100-day milestone from when the World Health Organisation first declared the coronavirus a global pandemic. The number of global infections exceeds 10m and there have been 500,000 deaths, as case numbers continue to rise across the world, and particularly in the US, India and Brazil.
Yet as we close the books on the second quarter, markets are clearly weighing up the future in order to make sense of the new normal. The NASDAQ index rose by 30% in the second quarter and has increased by 12% year-to-date, demonstrating how much investors are focused on technology and how it has the potential to transform workplace norms, shopping and travel. Meanwhile, the Dow Jones delivered 17.7%, its best quarter since 1987. Although Europe is lagging the US, the Eurostoxx 600 closed 13% higher at the end of Q2.
Ever since bourses hit a trough in March, there has been a notable divergence between market sentiment and the on-the-ground view of the health of the economy. Corporate earnings remain largely unpredictable as the spending freeze starts to thaw and economies slowly grind to a start.
Our US SMID team notes that earnings expectations for upcoming quarters have been adjusted down, with the most significant decline expected (unsurprisingly) in Q2 (see figure 1). Looking further ahead, other estimates have also been guided lower, although it looks like there will be a notable pick-up in Q3.
Figure 1. On the way down: S&P 500 bottom-up earnings-per-share estimates
Source: Refinitiv, William Blair, as at June 2020.
Yet there is considerable dispersion between sectors, shown by the divergence in price/earnings for the technology and financial sectors. The latter has languished recently, as the impact of corporate strain on banks remains unknown. Our US SMID team points out that this stress is apparent in the small-cap sector, shown by the steady increase of non-earners in the Russell 2000 index (see figure 2).
Figure 2. Non-earners in the Russell 2000 index
Source: Societe Generale, as at June 2020.
A green recovery?
Meanwhile, the irrevocable rise of green-finance activity continues unchecked (as we discussed in our recent piece, 'The sustainability of sustainability'). Our Impact Opportunities team notes that the pandemic seems to have ushered in an elevated sense of social awareness, with a growing acknowledgement that there is a need to build resilience in healthcare, food and water security, as well as across supply chains.
In addition, there have recently been several sustainable-investment milestones. These include the adoption of the EU taxonomy of sustainable investing and the EU Sustainable Benchmark Regulation. We see the advent of new EU climate transition and Paris-aligned benchmarks – as well as the requirement that environmental, social and governance factors are disclosed in other benchmarks – as an essential step in improving the measurability of sustainable investing.