Encouraging data from various countries on the state of the Covid-19 pandemic and massive interventions from the Federal Reserve helped stocks rebound last week.

The question now is whether markets have overreacted.

“In March, the markets appeared to overreact to the bad news; in April, they may also be doing the same with regards to the good news,” a report from Richardson GMP says.

The TSX/S&P composite index closed its best week in a decade on Thursday, while the S&P 500 had its strongest week since 1974, fuelled by a US$2.3-trillion intervention from the Federal Reserve.

At the end of last week, the S&P 500 was down 17% from its high, compared to 34% at its trough on March 24, the report says. The TSX was down 21% after last week’s rebound, compared to 38% at its low.

Even as pandemic data improve, though, there are other hurdles, Richardson GMP says.

First-quarter earnings may come in better than revised estimates, since most physical distancing policies didn’t start until the end of the reporting period, the report says.

However, stocks may not be such a bargain anymore. Valuations fell to 13 times price to earnings in March but have gone back up to 18 times.

“This is hardly what we would call ‘juicy valuations’ anymore,” the report says.

The authors also raise the concern that markets have been pricing in good health news and ignoring poor economic data. The risk is that the bad economic data will eventually weigh on markets.

“We are in for, at best, two or three months of bad data,” the report says.

“At some point the market may stop believing we will have that sharp V-shaped recovery and begin discounting a more moderate recovery or a longer period of economic pain.”

According to a National Bank Financial report, equity analysts expect a 9.2% contraction in earnings per share in Canada this year, followed by a 16% rebound in 2021.

U.S operating earnings per share are expected to drop 18% through the second quarter of 2020, the bank’s monthly equity monitor says, before rebounding sharply to pre-recession levels next year.

The National Bank report calls the scenario “ambitious,” as it relies on government programs enabling corporations to “kick-start” production as early as next month.

The authors of the National Bank report are maintaining an asset allocation that’s underweight fixed income and mostly market weight equities.

“The longer the idling of capacity, the greater the damage to labour markets and earnings,” the report says.

“That outlook might seem to counsel taking refuge in fixed income, but the recent tsunami of fiscal stimulus and central bank balance sheet expansion, coupled with a heightened risk of protectionism, suggest a rising term premium for government bonds.”

The Richardson GMP report says it’s become harder to find mispriced assets and deploy capital.

“Keeping some powder dry at this point makes sense, especially if the steady bad earnings and economic news ahead creates another opportunity.”