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Central bank firepower helped stock market bulls finish the first half of 2020 on a high. Now the rally hinges on follow-through in the third quarter from economic data, company earnings and the coronavirus newsflow.

With central bank and government stimulus approaching US$20-trillion, world stocks’ 35-per-cent collapse between Feb. 20 and March 23 – the swiftest and deepest sell-off since 2008 – has mostly reversed.

Global shares are within 10 per cent of their February record, while the U.S. Nasdaq and China’s Shenzen indexes are back at multiyear or record highs.

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Latest numbers from jobs to manufacturing have kept momentum going. But what comes next is important – for investors as well as possibly for U.S. President Donald Trump’s re-election prospects in November.

Economic data is essentially backward-looking, so April to June figures reflected first big falls, as lockdowns drastically curtailed activity, then a bounceback from March-April troughs. Data from July onward must confirm whether the rebound is becoming entrenched.

“For now, markets are still in a sweet spot. It’s not until the end of the quarter that we are going to get some visibility,” said Russell Silberston, co-head of developed markets FX and fixed income at asset manager Ninety One.

Markets risk being sideswiped by bad news, Mr. Silbertson said, adding: “If you believe markets are forward-looking, perhaps they are overly optimistic.”

What complicates the picture is that the figures mostly do not reflect record rises in U.S. infections and renewed lockdowns.

Extraordinary labour and business support schemes, such as furloughs in Britain or additional checks for U.S. unemployment, may mask the real state of affairs. Unless renewed, these schemes start to roll off from end-July onward.

Contrary to common belief, surging stocks and a shrinking economy can go together – past meltdowns attest markets can trough up to six months before crises end. But they do need to see data improving at a steady clip.

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“The rate of change [in data] matters more than the level,” said Morgan Stanley’s chief cross-asset strategist, Andrew Sheets. “Markets have got it right.”

OUTDATED EARNINGS

It’s still tough, for some, to square exalted share prices with the economic outlook. Citi strategists say consensus expectations for end-2021 earnings per share are 30 per cent too high.

That would imply global equities trading at 24 times forward earnings, rather than 17 times.

Anyone seeking earnings clarity won’t get that from the April-June reporting season starting next week, as that will mostly capture lockdown devastation. U.S. and European Q2 earnings are tipped by Refinitiv to have shrunk 40 per cent and 54 per cent respectively.

Instead investors are anxious for companies to point to signs of improvement in the third quarter, said Quincy Krosby, chief market strategist at Prudential Financial in Newark.

Markets see 2021 as when “we’ll start to see essential improvements in the economy and from companies. The more that’s pushed out, the more difficult it is for the market,” Ms. Krosby said.

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Reporting season is important for another reason – Morgan Stanley’s Mr. Sheets notes that current price/earnings ratios encompass a dire second quarter.

“Just by pressing the send button on Q2 earnings, your future earnings will rise. That will be optically important as we get through July,” Mr. Sheets said.

PANDEMIC VS POLICYMAKERS

There is so far no sign policymakers are ready to hit the brakes on stimulus. In fact, Citi predicts US$6-trillion in central bank asset-buying over the coming year.

But the union of monetary and fiscal policy has made the difference, meaning upcoming decisions on initiatives such as U.S. jobless supplements, Britain’s furloughs and the EU’s €750-billion recovery fund are key.

Perhaps ultimately the number that matters most is the virus count. Half a million people are dead – a fifth of them in the world’s biggest economy. Controlling that spread may be what determines Mr. Trump’s re-election chances.

For all those reasons, markets are see-sawing between risk-on/risk-off, said David Arnaud, a fund manager at Canada Life Investments.

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“The evolution of the virus is what will move markets – it’s a simple as that,” he said.

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