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The S&P 500 is up 7% in the past two weeks and is now within 6% of its February all-time high but Lisa Shalett from Morgan Stanley recommends to consider the cyclical sectors that are likely to benefit most from a potential V-shaped recovery rather than chasing recent gains in the S&P 500.

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Key quotes

“Rather than rush into the S&P 500, I suggest investors focus on underlying sectors that are likely to outperform that broad tech-dominated index. Already, market leadership is rotating to cyclical areas, like financials and basic materials, which are most likely to benefit from the V-shaped economic recovery that we believe is now more clearly underway.”

“Stock valuation measures for the S&P 500 are very high. For example, the famous ‘Buffett Indicator,’ which looks at total market capitalization relative to GDP, is currently at extremes last seen at the turn of the century. Alternatively, many cyclical sectors have very low relative valuations, due to concerns about global economic weakness.”

“The rise in longer-term interest rates tends not to support the growth stocks that dominate the S&P 500 index, but can be a positive for financials, which benefit when the difference between short-term and long term interest rates widens.”

“As for the S&P 500 index, our assessment remains that it will be range-bound over the next three to six months. I see it capped on the high end by valuation constraints, the lack of solid visibility on earnings, COVID-19 developments and tenuous US-China relations. On the low end, it will likely be supported by historic levels of monetary and fiscal stimulus.”


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