With the S&P 500 enjoying a market rally back to near pre-coronavirus crisis levels, the tech fuelled recovery is juxtaposed to the dilapidated state of the US economy.
The S&P 500 peaked on 19 February closing on 3,386 points, however, within 16 days it had fallen by 20 per cent – the fastest bear market in history – as the pandemic spread to 2,237.4 points on 23 March.
Since then, however, it has recovered to pre-pandemic levels.
Performance of S&P 500 since 23 March (in US dollar)
Source: FE Analytics
But this recovery must not be confused with the US economic situation, several fund managers and analysts argue, which is now firmly in a recession.
Indeed, the International Monetary Fund’s (IMF) June World Economic Outlook projected that the global economy will shrink 4.9 per cent this year, and the US by 8 per cent.
Below, fund managers and market experts discuss the disparity and where there is still opportunity in the US.
“There is clearly a lot of optimism currently being priced in”
With US equities having rebounded by 40-45 per cent while the economy is shrinking, T. Rowe Price’s US equity specialist Eric Papesh said investors are a lot more bullish about the long-term prospects. .jpg)
“If we think of the equity market as a forward-looking mechanism, then there is clearly a lot of optimism currently being priced in, with investors seemingly prepared to look beyond the near term to a post-crisis recovery,” he explained.
And although Papesh (pictured) expects increased volatility in the US market compared to previous years – as the coronavirus continues unchecked – “longer term, we do not anticipate a continuing and persistent disconnect between the US equity market and the underlying economy”.
And volatility isn’t necessarily a wholly bad thing, he added.
Papesh said T. Rowe Price actively seeks these market dislocations to generate alpha and are currently looking at the financials sector, which has suffered because of coronavirus, but is creating some interesting longer-term opportunities.
“It is important not to be misled by low-base effects or to confuse a strong recovery with a full one”
While the coronavirus has continued to rage in the US, economic data has remained strong with new jobs outweighing losses in May, retail sales jumping by 18 per cent and the Purchasing Managers’ Index (PMI) showing activity picking up faster than anticipated, Erik Knutzen, chief investment officer for multi-asset at Neuberger Berman, said the positive news cannot overshadow the reality that the US isn’t close to a full recovery yet.
“While some of these headline growth numbers have been remarkable, it is important not to be misled by low-base effects or to confuse a strong recovery with a full one,” he said. “Two and a half million jobs in the US is great news, but we need almost 10x that to get back to the unemployment levels of four months ago.
“PMIs have rebounded, but most indicate activity is still contracting, not expanding.” 
Knutzen (pictured) added: “Once the new equilibrium is established, pre-crisis conditions of low growth, low interest rates, low productivity and high debt are likely to be compounded by even higher debt, even lower rates, higher taxes, tighter regulation, lower consumer confidence, ongoing social distancing and travel restrictions, and, potentially, a steep cliff edge on the other side of the current fiscal stimulus.”
All of which equals a more risky outlook in the medium term, according to Knutzen, as the amount of stimulus and shoring up of household and corporate balance sheets means that the base line for the S&P 500 in an L-shaped recovery is now higher than it was three months ago.
“Where economic growth rates are low, the share of thematic and structural growth rises”
Diving into the US technology sector, Giles Money, global equities portfolio manager at Sarasin & Partners, said that the bull run of US-mega-cap names is still not over yet.
For the past few years the US market has been dominated by the sector’s “ultra-cap companies”, as Money (pictured) referred to them, and have been the driving force in its recent recovery.
These companies “are digitising the world at a rapid pace,” Money said, one of the five key themes in his portfolio, something which has been accelerated by the pandemic.
“Apple, Amazon, and Microsoft are all well over $1trn in market cap, with Alphabet (Google) not too far behind. They are all highly cash generative and, more importantly, have places to invest this cash,” Money said.
The advent of tighter regulation and taxation on the companies could halt the mega-caps’ deployment of capital and growth, but Money disagrees saying that he still finds value in this area “due to the positive backdrop relative to other much more challenged industries going forward”. 
He said: “Where economic growth rates are low, the share of thematic and structural growth rises,” making the world thematically driven.
“The question from here will be around which behaviours last, but what is clear is the US has many structural advantages.”
“What has been different about this cycle so far is leadership within the stock market”
“We are at the start of the US economic cycle, not the end,” said Anu Narula, head of global equities at Mirabaud Asset Management and manager of the $423.2m Mirabaud Equities Global Focus fund.
The cycle itself has been different, according to the manager, because cyclicals have lagged due to a flatter yield curve and “technological acceleration”.
“Going forward, we continue to think leadership can come from cyclicals, as their total addressable markets are growing,” Narula (pictured) said.
Highlighting payments service PayPal and US tech hardware company Nvidia as two stocks illustrating different secular trends, Narula said the former is tapping into the ageing economy and the older demographics increasingly using online payment and shopping options. Nvidia, meanwhile, is benefitting from broader moves into artificial intelligence (AI). 
“These are secular trends which will continue in the long term. While these companies look expensive on headline measures, the market often underestimates the ‘E’ of P/E [price-to-earnings ratio],” Narula said.
But there are still good stocks to be found in the ‘recovery bucket’, the nature of which has shifted due to coronavirus as consumer cyclicals have come in to replace the energy or industrial options they would’ve held in previous cycles. Companies such as TJX, Starbucks or Home Depot.
“We believe there will be a rotation between these buckets as we move out of the recession, and we want to ensure a balance between both,” he concluded. “We invest thematically, and many themes like explosion of data and platform companies, as well as health and well-being have accelerated in the last few months.”