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The stock market’s impressive recovery over the past four weeks in the face of surging unemployment and vanishing economic activity is making a number of influential observers concerned about what comes next.

“It is remarkable that the U.S. is in the midst of its greatest economic crisis in nearly a century and unprecedented societal disruption while the stock market trades at the same level as it did in June, 2019, just 10 months ago,” David Kostin, chief U.S. equity strategist at Goldman Sachs, said in a note earlier this week.

Elliott Management, the New York-based hedge fund firm with US$40-billion in assets under management, went a step further with its concerns by putting a scary number on where stocks could be headed.

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“Our gut tells us that a 50 per cent or deeper decline from the February top might be the ultimate path of global stock markets,” the firm, founded by billionaire Paul Singer, said in a letter to investors this week, according to Reuters.

These observations from the heart of Wall Street underscore what is arguably the most urgent question facing investors today: Is there a bigger sell-off in the works?

The S&P 500 fell 35 per cent from its record high on Feb. 19 to its intraday low on March 23, a five-week, panic-driven plunge that marked the fastest bear market in history. Since then, though, the blue chip index has recovered nearly half the points it lost.

After Friday’s gain of 2.7 per cent, the S&P 500 is just 15 per cent shy of its record high.

In many ways, the rebound makes sense. The pace of COVID-19 infections appears to be levelling off, hospitals are coping with the influx of severely ill patients and companies are developing promising treatments.

Indeed, Friday’s rally followed a report that a group of patients in Chicago using Gilead Sciences Inc.’s remdesivir drug have recovered quickly.

What’s more, the rebound follows unprecedented help from governments and central banks to support the global economy with low interest rates, bond purchases and financial assistance.

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“Governments have stepped up, people’s fears have been somewhat calmed, the money is going to flow,” Kevin McCreadie, chief executive of AGF Management Ltd., said in a phone interview.

He believes that the mood of investors has probably shifted from panic to relief over the past month. But he doesn’t believe that the stock market is in the clear now, given how investor sentiment can easily shift again.

In 2008, Mr. McCreadie noted, Lehman Brothers failed in September, marking a particularly frightening time for investors. Central bank and government intervention provided relief – yet the S&P 500 didn’t hit its lowest point for another six months as relief turned to despair.

Investors may be looking beyond the fact that 22 million Americans have filed for jobless benefits over the past three weeks – a record – on the basis that the job losses are the temporary result of the lockdown. But will those jobs come back quickly, restoring consumer spending and corporate profits?

That’s an open question, freighted with the possibility of a second wave of COVID-19 infections later this year. But the stock market appears blithely unconcerned.

“The ultra-rapid V-shaped snapback in equities just doesn’t jibe with the coming economic pain and/or the lingering uncertainty as to how long that pain will last,” Doug Porter, chief economist at BMO Nesbitt Burns, said in a note.

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Similarly, corporate profits suggest that stock prices are hardly a steal at current levels.

Grant Bowers, a U.S.-based portfolio manager at Franklin Templeton Investments, said that companies likely won’t be judged on their dismal 2020 profits. But even improved 2021 profit expectations provide little reason to get excited about valuations.

“The market is probably in the fairly-valued range. It’s not cheap; it’s not expensive,” Mr. Bowers said during a conference call on Thursday.

Mr. Kostin, the Goldman Sachs strategist, said that analysts expect companies in the S&P 500 will generate a combined profit of US$177 a share in 2021, which gives the index an estimated price-to-earnings ratio of about 16. Again, that’s not exactly a screaming deal.

“If consensus earnings per share forecasts are revised lower, as we expect, the implied market multiple will become even more elevated,” Mr. Kostin said.

The good news: Mr. Kostin doesn’t believe that another crash is coming: His earlier prediction that the S&P 500 will fall to a low of 2,000, he said, is now “unlikely.”

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But neither does he see a particularly strong rally from here. His year-end target for the S&P 500 is 3,000, implying an upside of about 4 per cent from Friday’s close.

Michael Hartnett, chief investment strategist at Bank of America, said in a report he sees a similarly limited upside scenario, and therefore recommends a “preserve wealth” portfolio divided into four even asset classes: gold, cash, bonds and stocks.

That’s right, this portfolio has a conservative 25 per cent weighting in stocks, which is hardly a bullish endorsement of the current rally.

Another approach: Focus less on diversified stock indexes and more on companies that can thrive in an uncertain future, such as well-established tech companies that largely sailed through the downturn.

Mr. Bowers, who oversees the Franklin Growth Opportunities Fund, expects that SBA Communications Corp., ServiceNow Inc., Microsoft Corp. and Amazon.com Inc. will continue to perform well amid rising demand for wireless communication, back office automation and cloud storage.

“As we emerge from this crisis, many large-cap companies will actually come out stronger, and their competitive positions will be reinforced,” Mr. Bowers said.

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