Volatility like the deadly China Wuhan virus can be infectious. So far it is difficult to gauge whether financial markets are being complacent or patient.

Due to the Coronavirus, economic data will be slow to pick up the extent of the damage to economic growth. However, already we have seen firms such as JPMorgan cut their global GDP forecasts for the first half of 2020 to 1.3% at an annualized rate the weakest growth since the 2008 world financial crisis. Economists expect China’s growth to drop to 1% this quarter from 6.3%.

The S&P 500 Index and 10-year U.S. Treasury yields could however drop significantly in 2020 amid the chance of a recession later this year, as the Coronavirus could be the black swan event that could be the catalyst for a more meaningful re-pricing of risk assets.

Global equities now worth $88trn, highest value in history. Equals to ~100% of world GDP.

American equities are almost back to where they were two years ago when they hit “peak happiness,” marking the highest levels of valuation, investor confidence, financial liquidity and risk appetites achieved during this decade-long bull market.

U.S. Stocks had a big rebound in 2019 out of the fourth quarter selloff of 2018. This occurred even though earnings growth for the S&P 500 flatlined and even turned sequentially negative late in 2019 leading many to ask if the recent rally is sustainable. The U.S. Central Bank Federal Reserve cut rate three times last year and this added to equity market multiple expansion.

Markets are out of rhythm with the fundamentals, with participants almost universally betting on a turn in global growth which has failed to occur.

Global central bankers granted the type of guarantee, markets had only dreamed of. Monetary policy will be used early and aggressively to backstop the markets, while no amount of excess would elicit any degree of monetary restraint. The Endless Punchbowl.

It’s true that stock prices don’t discount the past, they discount the future. While the relationship is not perfect, they, in fact, lead earnings by about six months. There is, however, a great deal of noise at times with stocks suggesting earnings growth or earnings declines that don’t materialize and stocks quickly change course to reflect the direction of their underlying fundamentals. Last year’s rally clearly implies a major rebound in year-over-year earnings growth over the next few months from about 0% to nearly 30%.

One reason this may turn out to be another example of noise rather than signal is that leading indicators for earnings like the direction of the dollar, oil prices and interest rates suggest earnings will actually decline this year by as much as 20% rather than rise that much or more as stock prices seem to suggest, even without coronavirus.

Fourth-quarter S&P 500 earnings are expected to have declined 0.6% year-over-year, which would mark the second straight quarterly decline, or a profit recession, the last of which occurred in 2015-2016. Yet, earnings are seen climbing about 10% in 2020, and strategists say that growth is needed to sustain Wall Street’s rally.

This past December we got the hotly anticipated phase-one U.S.-China trade deal. This created an all-in rally that truly earned the “melt-up” label, led by the popular big tech stocks and refusing to slow down or pull back despite becoming very stretched above its longer-term trend.

Unrealistic expectations could cause higher volatility amid the U.S. election cycle and ongoing geopolitical tensions. Earnings for companies listed on MSCI’s broadest measure for global equities are estimated to rise by 20% this year after having declined in 2019, according to data compiled by Bloomberg.

Should economic leading indicators prove to be right and stock prices wrong, it would leave a pretty sizable air pocket beneath the indexes. So, as it could help to adjudicate this debate, this earnings season we are now approaching and, more specifically, the guidance companies provide for the rest of the year could be more important than most.

Wall Street surged to record highs last month, partly reflecting growing hopes for a resolution to U.S. President Donald Trump’s tariff war with China. However, market participants are forecasting earnings that the world can’t deliver.

While the U.S. stock market is at all-time record highs, the bear market is in… fundamentals! The share of listed companies in the U.S. that have lost money over the past year has risen to 40%, the highest since the dotcom bubble of the late 1990 and the markets have not started to price in the potential disrupt to global supply chains should the Coronavirus continue to spread.

For the moment the financial markets appear to be taking the view, held for much of the past decade, that bad news like the Coronavirus now is good news for stocks and risk assets. However the coronavirus could be the catalyst for a correction and or the Multi-year top in U.S equites. Investors take note.