S&P 500 on cusp of all-time high despite pandemic’s toll

Unemployment figures remain in the double-digits and prospects of an economic rebound appear increasingly shaky as the coronavirus pandemic continues to spread across the nation. Yet signs of those headwinds are not apparent in the stock market, with the S&P 500 nearing a record rise.

On Monday, the S&P 500 hovered just shy of its earlier record, set on February 19 before the pandemic roiled the economy and caused widespread shutdowns. After the market suffered a rout in March due to the economic standstill, stocks have been on a remarkable roll — and Goldman Sachs analysts say it's likely to continue.

The divergence between the sputtering economy and the stock market has never seemed wider. Even as about 25 million people continue to draw on unemployment benefits and the nation suffers its worst quarterly decline in GDP on record, investors continue to push stocks to greater heights. While that disconnect may seem irrational, analysts say investors are focused on the potential for the economy to rebound in 2021, especially if an effective vaccine is developed that can help consumers and workers resume their normal behaviors.

"Remarkably, the S&P 500 index has fully recovered from its March trough and now trades close to its pre-pandemic peak," Goldman Sachs analysts wrote in a Friday research note. "As investors shift their focus to the recovery in 2021, Goldman Sachs Economics now forecasts U.S. GDP will rebound by +6.4% in 2021."

That optimism will help boost the S&P 500 by 7% to 3600 by the end of 2020, Goldman predicted in its report. On Monday, the S&P 500 rose 9 points, or 0.3%, to 3,382, a hair's breadth shy of its all-time high of 3386 in February.

The tech-heavy Nasdaq also gained on Monday, rising less than 1%, while the Dow Jones Industrial Average slipped 0.2% in early trading.

Markets seem to be banking on a deal between Democrats and Republicans on a stimulus package, even though both sides say they remain far from it. Without a financial lifeline, analysts say the economy won't be able to make the recovery investors have been assuming is on the way, an assumption that has been keeping the stock market as high as it is.

"Hence, another round of stimulus is the difference between ensuring that the economic recovery continues uninterrupted and a meaningful short-term pullback in growth," Morgan Stanley strategist Michael Zezas wrote in a report.

Markets seem willing to wait for a deal, for now. But if the negotiations go deeper into September, and Democrats and Republicans still remain at odds with each other on the size of a stimulus package, Zezas said it may be too close to the election to get one done.

Investors have also been buoyed by the Federal Reserve's pledge to keep rates low, as well as signs of economic improvement, noted Bruce Bittles of Baird in a Monday research note. For instance, last week the government said the number of out-of-work people filing for unemployment benefits fell below 1 million, a first since the pandemic shuttered the economy in March.

"Low rates encourage investors to move money into stocks as there is no other seemingly good alternative. Low rates also stimulate housing and capital spending," he noted. "A slow improvement in the economy can be found in the most recently reported initial jobless claims which fell below one million for the first time since March."

But there could be turmoil ahead, Wall Street analysts warned. The market could witness volatility as the presidential election nears, with Goldman calling the November 3 election as a "significant risk to our year-end forecast."

"As we have highlighted previously, the coronavirus introduces a major complication in the timely tabulation of voting results," they noted, adding, "Of course, the largest risk to our forecast is the timing of a vaccine and path of recovery from the pandemic."

—With reporting by the Associated Press.