S&P 500: despite second wave fears, data surge could bring further upside for US stocks

The release of purchasing managers index (PMI) data throughout Australia, Europe, and the US today has provided the latest signs of progress in the drive towards some semblance of economic normality.

Coming off the back of a recent surge in retail sales, today's rebound in June PMI figures across both manufacturing and services could be just the beginning of a period of economic recovery that may help maintain the bullish market theme.

Could second wave fears be overblown?

Recent fears have been centered upon the resurgence of the coronavirus in the US, with a spike in cases throughout many states heightening fears that we could soon see a second bout of lockdown measures undertaken to avoid the virus propagating further.

However, US President Donald Trump's claims that this rise in cases is simply a result of increased testing could have a basis in the truth, with the positivity rate and deaths per million people declining in much the same manner as other Western nations.

While the number of positive tests are on the rise, this appears to be a function of a greater push to reveal those with the virus.

Meanwhile, with the mortality rate on the slide, there is a growing feeling that nations are becoming better equipped to deal with this virus.

Therefore, while the absolute US numbers are substantially greater than those in Europe, they also have a much greater population than most.

Until we see the deaths per million rate rise substantially, the risk of a major second wave remains less of a threat to the economic recovery story.

The rise in cases across many states does raise the possibility of this death count gaining traction, with intensive care unit (ICU) availability playing a key role given the impact an overwhelmed healthcare system can have upon mortality rates (as seen in Italy).

While initial pharmaceutical breakthroughs have helped lessen mortality rates in intensive care units, the availability of those beds will be crucial in keeping a lid on the virus.

Will data maintain the rally?

The crisis has seen major shocking economic data releases come and go, much of which has been largely disregarded given their relatively backward looking outlook. Instead markets have been happy to look forward to potential improvements as a means to drive buying pressure.

With the economic data likely to continue improving as we move out of these lockdowns, the outperformance seen on the data front provides a signal that things are picking up quicker than expected. However, crucially it would be forward looking as it highlights the potential for a swift resurgence.

The caveat lies in the fact that a surge in Covid-19 deaths and a heightened risk of further lockdowns would subsequently dampen expectations around that future recovery.

Therefore, in the absence of an empirical move towards a second wave, there is a good chance we will see the economic calendar come back into focus as a driver of market sentiment.

S&P 500 rally proves steadfast despite risks

The S&P 500 has seen an incredible recovery throughout the past three months, with the index now just down around 7% from the record highs set in February.

That does mean that upside should be limited, with the risk more heavily shaped towards the downside. Nevertheless, the uptrend remains intact for now, with the index heading higher again today. The Federal Reserve (Fed) and the US government seem to be hooked up to the markets, with any downside greeted by another announcement.

This gives short-sellers the feeling that they are having to bet against the Fed. The more their hands are burnt, the less likely they are to bet against the market. This ‘rigged’ market sentiment can continue to provide further upside, especially if the data points towards a resumption of normality before long.

A break through the 3168 level would bring a bullish continuation signal following recent consolidation, with a decline below 3054 and particularly 2936 signalling the potential for another major decline. Until then, there is a good chance we continue to gain ground as markets brush aside fears of a second wave.