Schwab's Sonders: Second-Half Stock Market Outlook Is Cloudy

"This is not a normal recession," writes Sonders. She explains that in normal recessions, as government debt rises, private-sector debt declines but that hasn't been the case this year. Both are rising, with non-financial corporate debt, already at a record high before the pandemic, continuing to grow.

The Shape of the Recovery

Also, the V-shaped recovery that has followed many previous recessions and which many market analysts and economists had been predicting, is more likely to look like "rolling Ws" — up, down and repeat, according to Sonders. "The stock market probably got a bit ahead of itself in pricing in a V-shaped recovery." Sonders doesn't provide year-end targets for stock index levels or EPS forecasts.

Wells Fargo does, and its analysts are forecasting that S&P 500 EPS will decline 30% to $115 in 2020 and the index will ends the year near 3,250, about 100 points from its current level. 

"We believe worldwide reopenings, improving economic data and bullish investor sentiment support further 2020 gains," Wells Fargo analysts write in the firm's midyear outlook report. But they caution that "ongoing uncertainty surrounding the pandemic and the November elections" remain and could affect stock prices.

Wells Fargo analysts recommend that stock investors buy quality, favoring U.S. equities over international stocks and large- and mid-cap stocks over small caps. "This remains the appropriate positioning given economic and earnings uncertainty, limited upside to our 2020 year-end targets and our expectations for the U.S. economy to lead the global recovery."

Morgan Stanley has a very different view of which stocks to own now. "Late cycle high quality stocks remain richly valued and are likely to re-rate lower as interest rates rise at the backend," writes analyst Mike Wilson in the firm's midyear outlook. He favors small-caps over large-caps and cyclicals over defensive names within a scenario that expects a V-shaped recovery. 

Wilson doesn't expect there will be another lockdown of the economy even if a second wave of COVID-19 hits "because it's too damaging" and we are better prepared to deal with the outbreaks given wider testing and health care capabilities.

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