The S&P 500 is up 3% over the past 12 months as the market’s resilience continues to mystify many

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The coronavirus outbreak has sparked an unprecedented wave of job losses and decline in economic activity. And yet amazingly the stock market has posted a decent return over the last one year.

The S&P 500 is up more than 3% over the past 12 months while the tech-heavy Nasdaq 100 — which consists of the 100-largest companies in the composite — has gained more than 6% year to date.

Wall Street’s resilience comes despite the confirmation of more than 4.7 million coronavirus cases globally, with nearly 1.5 million of those coming from the U.S. It also comes in the face of a record spike in unemployment claims. However, those trends led the Federal Reserve and lawmakers to take up massive stimulus campaigns to help out the economy.  

“The Federal Reserve’s move to cut interest rates to zero as well as extraordinary amounts of liquidity injected into our financial system has helped stabilize the debt and equity markets during the COVID-19 upheaval,” said Bruce Bittles, chief investment strategist at Baird, in a note.

The Fed cut rates to zero back in March as the coronavirus pandemic began dampening the outlook for the U.S. economy. The central bank also launched an open-ended asset-purchase program. Last week, the central bank started buying corporate bonds —both investment grade and junk-rated — and some ETFs that own that debt.

Fed Chairman Jerome Powell also said Sunday “there’s a lot more we can do” to help out the economy. In an interview with CBS’ “60 Minutes,” Powell said: We’ve done what we can as we go. But I will say that we’re not out of ammunition by a long shot. No, there’s really no limit to what we can do with these lending programs that we have.”

Those comments helped spark a sharp rally Monday. The S&P 500 surged more than 3% while the Dow Jones Industrial Average jumped over 900 points. The Nasdaq 100 Index climbed over 2%.

U.S. lawmakers have also approved trillions in fiscal stimulus to help cushion the economic blow from the coronavirus. Some of the fiscal relief measures undertaken include sending stimulus checks directly to Americans and expanded unemployment benefits.

Recently, expectations of the economy reopening and hope of a coronavirus vaccine have also bolstered equities. Several states have begun easing their stay-at-home orders, gradually letting some nonessential businesses resume operations. Moderna reported Monday “positive data” from an early stage coronavirus vaccine trial.

Valuation concern

The market’s composition has contributed to its resilience as well. Data compiled by Ned Davis Research shows that about 58% of the S&P 500’s overall market cap is held by companies that have “not been meaningfully impacted by, or in some cases benefited from, the pandemic.”

To be sure, the market’s apparent resilience has also raised some flags on the valuation front as companies cut or withdraw their earnings estimates.

The S&P 500’s forward price-to-earnings ratio — a widely used valuation metric on Wall Street — currently sits above 20. Katie Nixon, CIO at Northern Trust Wealth Management, pointed out that’s above the 5-year and 10-year averages of 16.7 and 15.1.

“Valuations do appear elevated across different widely used metrics,” Nixon said in a post. “Bears believe that investors are paying too much for stocks today relative to near term earnings, which are uncertain at best given the stutter-step recovery of economies post COVID-19. The uneven re-opening of economies, and the lack of consistent broad-based testing and tracing as well as the timing of a potential vaccine, suggests that the outlook will continue to be uncertain into 2021.”

Nixon noted, however, she expects modest returns moving forward, adding: “investors don’t seem to be pricing in an upside scenario – an effective testing/tracing policy, a vaccine.”

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