No stimulus: limited gains for stocks

In the past month, the dynamics in the US equity market have clearly shown how vulnerable are risky assets in the near term as the economy is running out of stimulus. Firstly, we saw that the Fed’s balance sheet has stabilized at around USD 7tr in the past few months, which could eventually be perceived as a tightening policy in the current environment and result in an important drawdown in equities. Figure 2 (right frame) shows that the rise in the titanic rebound in the S&P 500 in the past few months was mainly driven by the mega-cap growth stocks (FANG+) amid the massive liquidity injections from the major central banks. The ‘bottom 490’ stocks are still trading at a 10% to 15% discount relative to their February highs.

Figure 1

Source: Eikon Reuters, RR calculations

The second risk is that as the unemployment