Thu, 09/12/2024 - 12:38
US stocks have had quite the past year or so, with a bull cycle that surprised everyone, not least since it has lasted over 20 months now. Since January 2023, the S&P 500 and Nasdaq 100 have gained over 35% and 70%, respectively, and continue to attract investors looking for long-term gains. However, last week, we began to see the cracks in this latest run as both the S&P 500 and Nasdaq 100 recorded drawdowns of almost 5% by close on Friday, 6 September, in their worst trading week since March 2023. The catalyst for this poor five-day stint appears to have been worse-than-expected employment data and ongoing uncertainty about the upcoming Fed rate cut and its size.
But there's much more to it than that. Key consumer confidence and inflation data loom in the short term, while the fallout from the recent presidential debate and ultimate election threatens to continue shaping the equities market until at least November. It seems like the future trajectory of the US market will be determined by a combination of macroeconomic indicators and fundamental developments until at least the tail-end of Q4 2024. In this piece, we assess these factors and their likely impact on stock prices.
Watch those macros
As is always the case with equities, near-term movements will be decided in large part by the macroeconomic situation in the US. Last week brought further news from the labour market, with the Bureau of Labour Statistics (BLS) reporting an addition of 142,000 jobs in August 2024, up 28,000 from July. It also noted that unemployment fell 0.1%, while wage growth came in slightly higher than expected at 3.8% year over year, which supports Fed Chair Jerome Powell's Jackson Hole comments stating that the labour market is no longer an inflationary threat. This development provides even greater justification for at least a 25 bps rate cut when the US regulator meets on 18 September. Indeed, the CME's FedWatch tool suggests a 69% chance of a 25 bps cut and a 31% likelihood of a 50 bps one.
Another macroeconomic guide that both the Fed and the market will be following is the latest Treasury yield numbers. The 2-year yield finished Friday's session at 3.651%, its lowest level since September 2022, closing below its 10-year counterpart for the first time in nearly two years. In the past, this un-inversion of the yield curve would be cause for celebration, but in a complete reversal of conventional wisdom, a recent study has suggested that it could be the sign of a coming recession. August’s CPI numbers released on 11 September showed a moderate overperformance as year-to-year inflation dropped to 2.5% (against a predicted 2.6%), its lowest level since 2021. This significant step towards the Fed's 2% target, and a 25 bps cut is expected at the regulator's upcoming meeting.
The ideal candidate
With all the talk about data and charts, it's easy to overlook what is likely to prove the biggest factor in US stocks' immediate fortunes: the US presidential election result. It's difficult to say who Wall Street will be rooting for, and the truth is, there's likely no single clear-cut answer. Historically and from a general policy perspective, we would expect Trump to be their favourite, but the Donald just brings too much unpredictability for many. Following the presidential debate this week, the odds of a Kamala Harris victory have now edged up to 55%. This comes after the Democratic candidate outlined plans to raise the corporate tax rate to 28% from 21% to ensure "big corporations pay their fair share" while proposing a similar hike for families with an annual income above $1 million.
Perhaps more worrying for Wall Street, though, is her idea to charge taxpayers with a net worth above $100 million a minimum tax on unrealised capital gains from assets such as stocks, bonds, or privately held companies. Her confirmed corporate tax hike is estimated to cut corporate earnings by at least 4%, yet the potentially devastating effect of an unrealised gains tax is still impossible to predict. However, Trump is not the stock market's saviour either, as his planned tariffs on Chinese corporations are also expected to hurt the many US companies that trade with China. Whatever the US public decides in November, there will be fallout for US equities, but the question is how the market will respond in 2025 amid a dovish monetary policy environment.
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