According to Wall Street Journal, the trailing 12-month PE ratio for S&P500 is 26.41. The long term average for this valuation metric is around 15-16. Thus, the S&P could drop by 40% from these levels – and still be fairly valued!
At the same time, the US unemployment rate is likely over 20%, and the GDP is in a deep recession – due to the forced economic shutdown in response to Covid-19. The argument is that as the global economies reopen, the GDP will strongly rebound in a V-shape recovery, which some use to justify the stock market valuation.
However, the reopening seems to be premature, which significantly increases the chance of the second wave of infections and another lockdown.
More importantly, the Covid-19 has accelerated the trend of de-globalization, which poses even greater challenge for the global economy over the short term and longer term.
On top of that, the racial intolerance in the US is intensifying which poses another layer of risk for the US economy.
The S&P 500 is in a bear market rally, which continues despite the forward-looking risks, and the technical resistance at 200dma. At which point the bear market resumes?