Investors’ focus on the upcoming election has led to a remarkably stagnant market over the past few months. The S&P 500 closed October at 5705, just 1% above its August closing level, and only 0.28% above where it traded after the Fed rate cut on 9/18. Given the uncertainty involved, many have been hesitant to make significant investments. Lowry’s Research’s proprietary measure of Buying Power has retreated 20 points over the past few weeks without a corresponding rise in Selling Pressure; a condition that has historically led to an eventual resumption of Buying Power and higher prices. Likewise, the median return in the market from November 1st through December 31st since 1990 is 3.3%, with a 3.9% median return in election years according to Bespoke. History suggests that a rally into the end of the year is likely.
Investors have also been focused on the path of Federal Reserve rate cuts and the upcoming meeting on 11/7. The market fully expects a 0.25% reduction in rates; data from the CME Group indicates markets are pricing in a 99.8% probability of a quarter-point cut. While this is not likely to be a significant market-moving event in our view, further confirmation on the direction of future interest rate policy could also be a catalyst for hesitant investors to invest sideline cash.
With over 70% of the S&P 500 companies having reported earnings this quarter, the earnings growth rate for the quarter stands at 5.1%. This compares favorably to expectations for 4.3% growth as of 9/30. Looking ahead, corporate earnings growth is expected to accelerate to 12.7% in the 4th quarter, and 15.1% in 2025. The trajectory of earnings over the next few quarters will have a far greater impact on the market than any election results or subsequent government policies.
In the short term, the risk to the market is a contested election in which the President and/or control of Congress is not known for weeks. If such an outcome causes a selloff in the market, we expect it would be short lived and quickly reversed. Markets often bottom on peak uncertainty; once the outcome is known, the market is likely to rally in our view. A strong earnings picture, widening market participation, and a healthy credit market should provide a tailwind to investors in the coming months.
