With recent polls indicating a possible Donald Trump win in the upcoming U.S. presidential race, markets are eyeing a scenario reminiscent of 2016. Despite close polling data, investor sentiment, as highlighted by JPMorgan strategists, suggests that financial markets could once again follow the pattern seen during the last Trump victory.
According to the JPMorgan report, equities might experience a "knee-jerk bounce" if Trump wins, similar to 2016. However, sustaining any rally would largely hinge on how bond yields respond and whether initial policy attention centers on trade or on economic and tax policies. Strategists note that investor positioning differs significantly from November 2016; today, investment levels are elevated, contrasting with the subdued positioning back then. Additionally, fiscal balances have deteriorated since that time, potentially limiting the scope for a major rally.
This time around, a Trump win would not be the surprise it was in 2016, as investors are widely prepared, with a strong equity positioning already in place. In contrast, a win for Kamala Harris could bring uncertainty over corporate tax policies, but reduced trade tariffs may provide some support for equity performance in that scenario.
JPMorgan also emphasizes the recent resilience in U.S. economic activity, with the U.S. Composite Economic Surprise Index (CESI) at high levels and the 10-year Treasury yield rebounding by 70 basis points from a low of 3.6% in September. Central banks are continuing their easing measures, though growth outlook remains the primary driver for equity markets. Strategists state that the “soft landing” narrative is broadly accepted, with hopes that it continues gaining traction after the election. Key to this would be a recovery in manufacturing and improvement in concerning labor market indicators.
Market Drivers: Key Factors Shaping Investor Sentiment
The report highlights specific market indicators to watch, including subdued Manufacturing Purchasing Managers' Indexes (PMIs) and mixed labor survey results. While hard data on the labor market has remained strong, strategists caution that conditions could shift quickly. The Eurozone’s economic data also lags behind the U.S., while China’s efforts to stimulate growth, primarily through monetary policy, have yet to effectively counter broader structural challenges.
The Federal Reserve’s ongoing rate cuts are raising questions about bank reserves, which have remained strong despite recent tightening. This trend may eventually change, creating a gap between the Fed’s actions and equity market expectations. The U.S. dollar is identified as a “wild card” for markets, as excessive strength could become a challenge for riskier assets.
Valuations and Earnings: Navigating High Expectations
The report points out that topline growth is decelerating, which may weigh on earnings per share (EPS) growth forecasts. Projections for a 12% profit growth rebound by 2025 could face downgrades. Additionally, the U.S. forward price-to-earnings (P/E) ratio stands at a stretched 22x, appearing high relative to real yields.
Lastly, JPMorgan notes that investor positioning remains robust, with household equity allocations at record levels as a percentage of total assets, suggesting limited room for additional equity exposure.
Market Outlook: Preparing for Key Election Outcomes and Economic Trends
As the election nears, JPMorgan’s report underscores the complexities of the current market environment, with investors weighing the potential outcomes and their implications on equities, bond yields, and the dollar. With elevated valuations, high household equity exposure, and cautious optimism for a soft landing, markets are poised for potential shifts as election results unfold and global economic trends continue to evolve.
