This has been a huge month for news, and Wall Street and has been taking in every drop of it. On election night, we learned that five states had legalized marijuana in some capacity, and found out less than a week later that Democratic Party challenger Joe Biden would become the next President of the United States, as Wall Street had been modeling for months.
But it was the jaw-dropping coronavirus disease 2019 (COVID-19) vaccine announcements from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) over the past two weeks that've really shaken the tree and sent the broader market roaring higher.
It began with Pfizer and development partner BioNTech (NASDAQ:BNTX), which reported wildly successful interim analysis results for their COVID-19 vaccine BNT162b2 on Nov. 9. The study, which has enrolled more than 43,000 participants, produced a vaccine efficacy (VE) that was greater than 90%. With most researchers expecting a VE of closer to 50% to 60%, which is typically what we see in influenza vaccines, this blew expectations out of the water.
This was followed a week later by Moderna announcing that its interim analysis for mRNA-1273 in the COVE study yielded a VE of 94.5%. Moderna's study involves more than 30,000 U.S. participants, and it's working with McKesson as its vaccine distributor.
These analyses suggest that there may well be a light at the end of the tunnel for the COVID-19 pandemic, and it rightly has Wall Street excited. In the first 10 trading sessions of November, the S&P 500 has gained 10.9%, which marks its best start to a month since 1987.
But what if I told you that these vaccine announcements may well signal a top in the stock market? Though it'd probably be hard to believe, with the prospect of "normal" brought back into perspective, there are four very valid reasons to be skeptical of equities, and COVID-19 vaccine stocks, in the near term.
We still don't know the finer details of these studies
To begin with, I'd strongly encourage investors not to overlook that both interim analyses lack critical data. While the VE from both studies is highly encouraging and much better than pretty much anyone could have predicted, it's not telling us the duration of VE or breaking out how well these vaccines performed in the most at-risk groups, such as the elderly and persons with chronic health conditions. The duration of protection is especially important and could have wild implications on the success of a vaccine and its desirability by the public.
There will be distributional/timeline challenges
This probably goes without saying, but just in case you've forgotten, this pandemic isn't a light switch that's going to be turned off by these vaccines. Even making the leap and hypothetically assuming that the Pfizer/BioNTech and Moderna vaccines are approved, we're unlikely to see nationwide availability of these treatments until the midpoint of 2021. This means it could be almost a year before we see widespread uptake of either vaccine.
There may also be distributional challenges. The Pfizer/BioNTech vaccine needs to be stored at minus 112 degrees Fahrenheit (F), which could be especially tricky. The Moderna vaccine isn't nearly as concerning, with the treatment expected to remain stable for 30 days at between 36F and 46F. It can also be shipped and stored for up to six months at -4F.
The good news is already built into valuations
Another issue to consider is that it's going to be very hard to top the initial VE's that Pfizer/BioNTech and Moderna have brought to the table during their initial analyses. With the exception of a truly upper-90-percentile VE and a considerably more shelf-stable vaccine candidate, we've probably already seen peak euphoria built into these COVID-19 vaccine stocks.
For example, Moderna ended Nov. 16 with a market value of nearly $39 billion. That's about eight times higher than its peak annual sales projections for mRNA-1273, and something on the order of 10 times higher than where mRNA-1273's annual sales are expected to settle after an initial peak. With more than two dozen drug developers also developing a vaccine, Moderna is looking exceptionally pricey. One miscue, or one market-topping interim analysis, and this bloated valuation could quickly deflate.
Sector rotation could be bad news for investors
But the scariest thing of all might be the sector rotation we see on this vaccine news away from the work-from-home companies and toward value stocks.
If you ask me, I think it's about time that value stocks received some love from Wall Street. They've been left in the dust since the Great Recession, with historically low lending rates encouraging high-growth businesses to borrow and expand. But it's these high-growth cloud, cybersecurity, and telehealth industries (to name a few) that've been responsible for driving the broader market higher in 2020. If we see continued investment rotation out of these high-growth stocks and into slower-growing value plays, it'd be a telltale sign that the stock market has hit its peak. If anything, supporting nosebleed valuations becomes much tougher when slower-growing value stocks are leading the charge.
For what it's worth, I don't suggest investors alter how they're putting their money to work in the months and quarters that lie ahead. However, be mindful of the real possibility that an abundance of great news this month may well mark a top for the broader indexes.