U.S. stocks have been fairly resilient lately, even as coronavirus hotspots flare up around the country. Although consumers and businesses are increasingly worried about rolling shutdowns, major stock indexes generally have moved sideways. How long can this continue? Much depends on the shape of the economic recovery.

Global stocks have held onto their gains, as well. There may be an incentive for investors in some countries to anticipate that an economic slowdown—perhaps a W-shaped recovery instead of a V-shaped one—wouldn’t be so bad because governments could step in and buy stocks.

In fixed income markets, we expect second-half returns to be driven more by coupon income than price gains, and by government fiscal policy rather than central bank monetary policy. This would be basically a reversal of what happened in the first half.

U.S. stocks and economy: V- or W-shaped recovery?

With key parts of the U.S. economy still ailing and coronavirus case growth rising, some investors and market watchers have grown skeptical of the market’s resilience. Looking at the market’s internal conditions, some of the skepticism seems valid. Market breadth in particular has turned quite weak since early June. A declining number of stocks within the S&P 500® index are trading below their 50- and 200-day moving averages.

Also, the top five stocks in the S&P 500 (by market capitalization) have grown to more than 22% of the index, a degree of concentration that is higher than during the dot-com era that preceded the early-2000s tech bust.

The five largest S&P 500 stocks now make up more than 22% of the index

Source: Charles Schwab, Bloomberg, as of 6/30/2020. Past performance is no guarantee of future results.

The S&P 500 has rallied sharply since its March 23 low, as segments of the U.S. economy have reopened in some capacity. The initial reopening efforts led to surges in economic data, creating a V-shaped early recovery. However, when activity is near zero, any rebound looks dramatic. As you can see below, The Conference Board’s Leading Economic Index plunged and rebounded. Although the latest monthly change (right chart) was substantial—and indeed, V-shaped—the current level (left chart) remains far below its pre-pandemic peak.

Trend versus level

Source: Charles Schwab, Bloomberg, The Conference Board, as of 5/31/2020.