Can Wall Street keep booming during a Main Street bust?

US stocks rose last week, and the broad S&P 500 finished on the cusp of new record highs as the bulls and bears staked out their positions, and as legislators squabbled about the second round of Covid-19 pandemic relief.

This week, earnings from major retailers such as Walmart and Target, US-Chinese tensions and further stimulus negotiations will determine whether the S&P 500 completes the last step to new heights.

Even in the modern momentum-driven stock market, the resurrection of the S&P 500 is a puzzling phenomenon. Since the S&P 500 last hit a record high hardly six months ago, the US has seen one of the deepest recessions in its history, roughly 200,000 deaths from a modern plague and the best 100-day performance in stock-market records, said Ryan Detrick, chief market strategist at brokerage LPL Financial. It's still a mystery to many bears how the "market reality" has become so far removed from the "economic reality".

There are three chief explanations. The first is dubbed "there is no alternative" - essentially, this explanation gives the Federal Reserve full responsibility for the stock-market rally. The central bank's policy has tamped down Treasury yields to such an extent that there's no way a person's savings can keep up with inflation without buying risky bonds or stocks.

The Fed's goal was to make sure companies have access to capital, and to stave off the kind of financial crisis that appeared to be descending in March. The by-product is a richly valued stock market, according to this theory.

The second explanation is that we are living in a "Robin Hood" market. According to this theory, an army of day traders were recruited by the free stock-trading app during the Covid-19 lockdown in the spring, and the newcomers have now upended global stock markets. The mind-boggling gains in stocks such as Tesla and Zoom Video Communications have more to do with their popularity among this new generation of day traders than with their relatively modest revenue streams, according to this theory.

The third explanation is the idea that many major corporations' growth prospects have improved despite the pandemic. Apple, Microsoft, Amazon.com and other "mega cap" companies have seen greater demand for their services as people seek alternatives to "bricks-and-mortar" stores and offices.

All three explanations may have truth to them, but none of them are sufficient to make the rally sustainable during an ongoing global recession, said one money manager.

What hasn't been accounted for "is the effect of the enormous global layoffs, part of which is still to come", said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund.

Currently, sellers of cloud-computing services such as Amazon and Microsoft are receiving payments from corporations for both office software and work-from-home alternatives. As corporations are forced to choose between retaining their office spaces or making a permanent shift to remote work forces, one of these revenue streams will disappear, Mr Di Mattia predicted.

Another reason why the S&P 500 could fall at the last hurdle to new records: markets are already starting the countdown to the November election. With voters fired up about the Joe Biden-Kamala Harris Democratic ticket, strategists are beginning to assess the risks to markets from shifts in economic policy. "Rather than hauling tech CEOs in front of Congress, would they actually begin to break up large tech companies?" said Quincy Krosby, chief market strategist at Prudential Financial.

Another potentially destabilising shift would come with any major changes to healthcare policy, said Ms Krosby.

The Democrats will also likely take a slightly different approach on Chinese relations. President Donald Trump pushed the two sides closer to a Cold War last week, with a formal ban on US companies doing business with Chinese social network TikTok.

The S&P 500 is almost sure to notch new record highs this week, but the rally may not go much further than that without a second stimulus bill.