Election Day is almost here. The looming question remains how a Donald Trump or Kamala Harris victory will shape the market narrative for the rest of the year and beyond.
Investors should soon learn the answer, with Americans heading to the polls on Tuesday. In the week before the election, the S&P 500 (^GSPC) fell about 1.37% while the tech-heavy Nasdaq Composite (^IXIC) shed 1.5% despite hitting its first record close since June during the week. Meanwhile, the Dow Jones Industrial Average (^DJI) dropped just over 0.1%.
It's not the only big event of the week. On Thursday, the Federal Reserve will announce its latest policy decision, with markets largely anticipating that the central bank will cut interest rates by a quarter percentage point.
Earnings season rolls on with a week headlined by reports from Palantir (PLTR), Super Micro Computer (SMCI), Arm (ARM), Qualcomm (QCOM), and Moderna (MRNA).
Election risk?
One of the top potentially market-moving events that strategists have discussed throughout the year has finally arrived with the 2024 presidential election slated for Tuesday, Nov. 5.
But it's been an abnormal election year for markets. When analyzing the S&P 500's average intraday trading range, Carson Group chief markets strategist Ryan Detrick found that this past October was the second-least volatile month leading into an election in the past 50 years.
Zooming out further, research from Bespoke Investment Group shows the S&P 500 had its best start to an election year since 1932, with a 20% year-to-date return for the benchmark index through the end of October.
Still, Election Day itself is considered a risk event for markets. Speculation has built that a "Trump Trade" has been forming in markets as the betting odds of the former president winning the election have risen. But some market strategists aren't convinced there's a clear read on what outcome investors will be rooting for come Tuesday.
"I think the market would do fine with Harris," Yardeni Research chief markets strategist Eric Wallerstein told Yahoo Finance. "I think the market would do fine with Trump. I don't think the stock market is really pricing any presidential odds."
Franklin Templeton chief markets strategist Stephen Dover told Yahoo Finance that the key for markets could simply be getting past the event itself.
"Just having those elections settled, whichever way it goes, would be positive," Dover said.
Baird market strategist Michael Antonelli agreed, telling Yahoo Finance that the riskiest scenario from the election is "one where we just don't know the winner."
Then comes the Fed
Markets are widely expecting the Federal Reserve to cut interest rates by 25 basis points when it announces its next policy decision on Nov. 7.
The key question entering the meeting is what the Federal Reserve will (or won't) signal about its plans for future meetings. Given that data has continued to show an economy pacing for solid growth while inflation's path down to the Fed's 2% goal remains bumpy, markets have moved to price in fewer interest rate cuts over the next year than initially thought when the Fed cut rates by half a percentage point on Sept. 18. As of Friday, markets see about three less rate cuts through the end of next year than previously thought.
Morgan Stanley chief global economist Seth Carpenter doesn't think markets will get much more clarity on the Fed's path in the coming week.
"The strength in growth gives the Fed patience as it allows policy easing to be gradual," Carpenter wrote in a note to clients on Friday. "Neither inflation nor unemployment is forcing the Fed's hand. We do not expect Powell to give specific guidance on the size or cadence of future cuts. Policy remains data-dependent, and neither the September 50 [basis point] cut nor the November 25 [basis point] cut indicates the future pace."
Earnings appear solid
The market's debate over how much easing the Fed will enact over the next year has sent the 10-year Treasury yield (^TNX) soaring since the last Fed meeting in September. The 10-year added about 7 basis points on Friday to close near 4.36%, its highest level since early July.
Baird investment strategist Ross Mayfield told Yahoo Finance that the move in rates, and the overall focus on the economic data driving them higher, is overshadowing what's shaping up to be another solid quarter of corporate results.
With 70% of the S&P 500 having reported quarterly results, the benchmark index is pacing for year-over-year earnings growth of 5.1%. This would mark the fifth straight quarter of earnings growth as the index continues to rebound from the earnings recession seen in 2023.
"We went through a two-year period where earnings were flat," Mayfield said. "They were volatile. Now we have earnings on the rise again. They're beating analyst expectations at a pretty solid clip. Profit margins are expanding. So the big picture is things look pretty good."
And that story appears to be staying intact for the fourth quarter too. Since the period began at the start of October, analysts have cut estimates by 1.8%, according to FactSet data. This is in line with the average cut to earnings seen over the past 10 years.
"At a certain point, earnings have to take the baton," Mayfield said. "I think we're in a good position for earnings to do that."
