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Investors are selling risk assets and seeking safe havens, with major US equity benchmarks trending lower. Lower interest rates are driving real estate stocks, higher oil prices are boosting energy, and defensive positioning is motivating purchases of utilities and healthcare names.
“Despite recent selling, the S&P 500 is still trading close to 22 times earnings amidst quarterly results that aren’t impressing investors in aggregate. In addition, the benchmark is still up 15% year to date, which is terrific considering it isn’t even August,” says José Torres, Senior Economist at Interactive Brokers.
Torres is of the view that the equity correction is far from over – A 10% to 15% correction was in the cards this quarter, historically the worst period of the year. This quarter, the valuation concerns are paired with front-loaded gains, irrational exuberance, a high bar for earnings estimates, and a Presidential election that may fundamentally change the technology sector for the worse from an earnings standpoint.
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Finally, a critical component is the narrowing spread between the 2- and 10-year yields, which now stands at 16 bps. Violent equity market corrections have occurred when the two instruments have reached rate parity in the past after inversions. This time isn’t different – adds Torres.
The US stock market outlook for the remaining months in 2024 also hinges a lot on the American election outcome. David Miller, Co-Founder, CIO, and senior portfolio manager at Catalyst Funds says, “Regarding big tech, I’m not sure that policies would be dramatically different under Trump. I think it’s pretty clear that when Trump lowered federal corporate tax rates from 35% to 21% in 2017, it had a significant impact on the market.
If you look at Kamala’s favorability ratings, they’re even worse than Biden’s were. If they replace Kamala with someone who has better favorability but policies similar to Biden’s, I think the market would view that as a net negative.
On the other hand, I believe the market would view a Trump win as a net positive, given that his tax cuts in 2017 were a significant part of his economic policy.
I think inflation is still a concern, but it’s less acute now. For example, the Inflation Reduction Act, which the Biden administration described as putting trillions of dollars into the economy, seems more like a large spending policy. Describing it as an effort to reduce taxes is somewhat misleading. This is not to say that Trump wasn’t a big spender either, but from this perspective, it’s less acute.
I believe we are likely headed for a period of higher interest rates and modest inflation, rather than returning to the days of zero interest rate policy, regardless of who wins. The most significant factor will be interest rates. I think Trump would push harder on the Federal Reserve and tax policy, where a lower corporate tax rate is a win for investors.”
The market is also anticipating US Fed rate decreases beginning in September. Rania Gule Market Analyst at XS.com says, “The shift to small-cap companies also comes as investors grow increasingly excited about the Federal Reserve soon cutting interest rates, a move seen as particularly beneficial to smaller companies in the economic cycle.
I think traders may also be hesitant to make big investment moves or open new positions ahead of major earnings releases and economic news in the coming days. Later this week, the focus is likely to shift to personal income and spending data for June, which includes inflation readings favoured by the Federal Reserve.
I believe these data will significantly impact interest rate expectations, with the Federal Reserve widely expected to cut interest rates by a quarter point in September.”
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