“Navigating Election-Driven Volatility and Market Sentiment”

Marco

There has been a notable surge in betting odds favouring Trump, with an increase of 9% in just one month, likely fuelled by optimism about his chances of winning the crucial swing state of Pennsylvania, which holds the highest number of electoral votes among swing states. However, polling data can often be biased and unpredictable, making it unwise to rely on these figures for investment decisions; they should merely serve as a narrative of the current market landscape. Additionally, even if Trump secures a victory, he may not have full control over policymaking, as Congress is also facing elections, potentially altering the political dynamics compared to his previous presidency in 2017.

Currently, all 435 seats in the House of Representatives are up for election, with Republicans defending a slim lead of four seats, as indicated in the outer ring of the accompanying figure. Meanwhile, Democrats hold an advantage in the Senate, currently comprised of 49 Democrats and four allied independents. However, they face considerable competition, as 34 out of 100 Senate seats are contested, requiring them to defend 19 of those seats.

Historically, volatility tends to peak one month after elections, with significant price movements typically observed in U.S. Treasuries and small-cap stocks.While elections typically do not lead to significant changes in regimes, prioritizing policies is more important than focusing on short-term trades or the President themselves. Examining the potential contributions of each candidate reveals stark contrasts: Trump advocates for substantial corporate tax reductions, whereas Harris aims to raise corporate tax rates. That said, many of the policies proposed by both parties may be viewed as inflationary and fiscally straining. This could result in structurally higher yields persisting over a longer duration.

Historically, most assets, except for broad commodities, tend to pull back months before elections and rebound one month after. However, in the long run, factors such as inflation, interest rate trajectories, growth, and productivity are far more influential. The key takeaway is that policies hold greater significance than party affiliation. This time, with both candidates advocating potentially inflationary policies, large-cap stocks and long-term yields may experience pressure once the initial euphoria subsides. Nevertheless, we will monitor market momentum and seek opportunities for profit-taking and repositioning.

Equities

The U.S. economy remains on solid footing. GDP growth stands at 3% and, while projected to slow slightly, is expected to hold steady around 2%, indicating the economy is still in an expansionary phase—albeit a more mature one. Key cyclical indicators, such as residential investments, business fixed investment, and light vehicle sales, all suggest the economy is performing well but more importantly without signs of overextension. This sustained momentum suggests the economy is not nearing a bubble, reducing the likelihood of a sharp downturn. Should a recession occur, indicators suggest it would likely be mild.

Additionally, the labour market, while showing cooling signs, remains resilient. The ratio of job openings to unemployed workers has declined but still sits above one—a level that exceeds any point before the pandemic. This reflects slower hiring but low layoffs, keeping consumer to still be in solid financial shape. Overall, the labour market has shown signs of normalization without tipping into recessionary territory.

Corporate profits and earnings growth are among the most significant drivers of U.S. stock markets. Profit margins have strengthened this year, currently well above pre-pandemic levels. Large-cap tech companies have primarily led this earnings growth, maintaining high margins and solid earnings power, and are expected to continue doing so. Additionally, profit margins are projected to increase across companies of all sizes in 2025, as reflected by the small-cap Russell 2000 Index, suggesting a potential lift for the broader market.

While earnings growth projections for 2024 have been revised slightly lower to a robust 9%, expectations for 2025 have risen to over 15%—a promising outlook indicating an ongoing, broad-based earnings recovery. Even lagging sectors are expected to see positive earnings growth by Q4, supporting a healthier overall earnings landscape. These fundamentals continue to bolster valuations in the U.S. stock market, providing stability amid potential volatility from geopolitical tensions or election uncertainties.