Author: Ana Montes

With the November U.S. presidential election approaching, and with former President Trump leading in the polls while President Biden endorses Vice President Kamala Harris, a key question arises: how do elections affect markets and portfolio returns?

Do elections matter in the long run?

To answer this, let’s look at some historical data. Surprisingly, markets have trended upward no matter which party wins the election. Since 1933, with eight Democratic presidents and seven Republican presidents, the market trend has always been upward. The key is to stay invested!

Landslide victory or balance in Congress?

It’s not just the presidential election that matters. Markets have had good returns regardless of how Congress is composed. Since 1933, there have been 44 years in which one party controlled both the presidency and Congress, with an average return of 14.4%. Even with a divided Congress, returns were almost as good at 13.7%. And even when Congress was of the party opposed to the president, returns were still in double digits (11.7%).

Investor Behavior

Elections impact investor behavior. During election years, many tend to opt for lower-risk instruments. However, right after the election, equity funds tend to see the largest net inflows. This indicates that investors prefer to minimize risk during election uncertainty and reconsider riskier assets once it passes.

Changing strategy during these years can limit long-term portfolio returns.

The history is clear: those who stayed on the sidelines during election years performed worse on 17 occasions, and better on only 3. In contrast, those who stayed invested or made monthly contributions achieved higher average balances.

Conclusion

Although presidential elections can influence market behavior in the short term, staying invested for the long term has proven to be a winning strategy.

Hypothetical historical growth of a US$1,000 investment in the S&P 500

Note: Party control dates are based on opening dates. Values are based on total returns in USD.
Source: Capital Group

Three hypothetical US$10,000 investment strategies during an election cycle

Note: Returns and portfolio values are calculated monthly and in USD. The analysis begins on January 1 of each election year and reflects a four-year holding period. Past performance is not predictive of results in future periods.
Source: Capital Group

The Global Wealth Report 2024, which analyzes the trends and dynamics impacting the global economy, is now available, and here are the highlights.

Recovery since 2022

2023 marked a positive change in global wealth, recovering from a drop in 2022. Global wealth increased by 4.2% in USD terms, thanks to the EMEA (Europe, Middle East and Africa) region, which grew by 4.8%. This recovery is due to the stabilization of global markets, the post-Pandemic economic recovery and an improved investment climate in key regions.

Wealth Distribution

Over the past two decades, the distribution of wealth has changed dramatically. The proportion of individuals with wealth below USD 10,000 has halved, while the highest levels of wealth have increased significantly.

What does this mean? The trend indicates that more and more people are achieving higher levels of wealth, reflecting an increase in the value of assets in various markets. However, global wealth inequality shows different dynamics:

• North America has experienced a slight decrease in inequality.
• In contrast, certain parts of Asia and Eastern Europe have seen increases in inequality.

This change in the distribution of wealth is a key indicator of global economic and social dynamics.

Regional Performance

• Asia-Pacific: Continues to show the fastest growth in wealth, driven by rapid economic expansion and the rise of the middle class. However, this growth is accompanied by rising levels of personal and corporate debt, raising concerns about sustainability.
• North America: Especially in the United States, wealth growth has been robust due to strong stock market performance and high real estate values. Wealth inequality has seen a slight decline since 2008, thanks to various socioeconomic policies.
• Western Europe: Shows mixed economic performance. Countries such as Germany and Switzerland continue to see a significant increase in wealth, while others face economic stagnation due to challenges such as political instability and a slower post-Pandemic economic recovery.

Inflation and Exchange Rate Effects

In 2023, inflation-adjusted real wealth growth reached 8.4%, highlighting significant gains compared to the previous year.

What drove this growth? Primarily, lower global inflation rates played a crucial role. In addition, currency fluctuations had a major impact, affecting wealth performance in countries such as Japan and the United Kingdom.

This real and inflation-adjusted growth underlines market resilience and recovery capacity.

Deceleration Trend

The report reveals a gradual deceleration in global wealth growth from an annual average of 7% between 2000 and 2010 to just over 4.5% between 2010 and 2023.

Why is this happening? Primarily due to market saturation in developed economies and economic volatility in emerging markets.

However, there is good news: the number of top wealth individuals is projected to increase significantly by 2028, with emerging markets accounting for nearly 32% of global wealth. This projection is based on continued economic growth and rising asset values in these regions.

In addition, a significant transfer of wealth is anticipated over the next two to three decades, with USD 83 trillion (trillion in U.S. values) expected to be transferred. A substantial amount of this wealth will be passed between spouses before reaching the next generation.

Distribution of global wealth by region in 2023

Source: UBS

The U.S. economy added 206,000 jobs in June. However, it was notable that the report revised down previous estimates of job creation in May and April. According to the consensus estimate, the economy was expected to add 190,000 jobs in June from the 272,000 originally reported in May, a figure that was adjusted to 218,000. In addition, the April hiring increase was revised to 108,000 from 165,000. With these revisions, the June employment report showed a slowdown in the three-month moving average for hiring. The report also highlighted that the increase in new jobs was led by government, health care, social assistance, and construction. Conversely, several sectors experienced declines, including professional and business services and retail trade.

On the other hand, the unemployment rate, which had been expected to remain at 4.0% from May to June, rose to 4.1%, placing it at its highest point since October 2021. This level of unemployment is more aligned with the macroeconomic scenario recently shared by the Federal Reserve (Fed). That said, it is important to mention that, in June of last year, the unemployment rate stood at 3.6%.

As for wages, the average hourly wage increased 0.3% during the month, which implied an annual advance of 3.9%, both figures in line with estimates, although the latter below May’s 4.1% annually. The average workweek remained stable at 34.3 hours.

This deceleration in employment generation, and subject to confirmation by the end of the week that June inflation may have dropped to 3.1% annually from 3.3% according to the market forecast, should be factors that, in turn, could allow the Fed to implement a first 25 bp cut in the reference rate during the September 18 meeting. In this context, the consensus odds of seeing a cut stand at 73%, up from 46% about a month ago.

Monthly Change in Nonfarm Payroll – 3 month moving average

Source: Morningstar

Federal funds rate expectations for the September 18, 2024 meeting

Source: Morningstar – CME

Corporate earnings season for the second quarter of the year will begin in two weeks, with several large banks such as JP Morgan, Citi and Wells Fargo reporting on July 12. Mega-cap technology companies will begin reporting later in the month, most notably NVDA, which will report through August 23.

In this context, the consensus estimates that earnings per share (EPS) of the companies comprising the S&P 500 could grow by 9% annually, which would represent the strongest growth since the 4Q21. Earnings are expected to decline only in the Materials (-11% annually) and Industrials (-1%) sectors. In contrast, the Technology (+17%) and Communication Services (+17%) sectors are anticipated to show the fastest growth compared to other sectors, led by mega-cap tech stocks. Overall, the top six S&P 500 stocks (AMZN, AAPL, GOOGL, META, MSFT and NVDA) are projected to grow their Q2 EPS by 30% annually, while the other 494 companies will grow by 5%.

Another relevant fact is that revisions to consensus estimates have been unusually resilient recently. Typically, quarterly consensus EPS estimates are usually reduced by 7% during the 6 months leading up to the start of earnings season. However, over the past six months, the 2Q24 EPS consensus estimate has barely declined by 1%. Excluding mega-cap tech companies, analysts have cut EPS estimates by 3%.

On the other hand, analysts are forecasting sales growth of 4% annually for the period. With this combination of factors, the companies’ net income margins, excluding the energy sector, are expected to stand at 11.7%, which represents an increase of 58 basis points (bps) annually, albeit only a 14 bps increase quarter-over-quarter (2Q24 vs. 1Q24). The recent slowdown in labor and material costs suggests that this margin forecast could be achievable.

With all of the above, EPS for S&P 500 companies is expected to grow 9% for the full year compared to 2023, with sales growth of 5%. Undoubtedly, the quarterly reporting season that is about to begin will be a near-term catalyst on investors’ radar, given the strong performance the S&P 500 has experienced so far this year.

Consensus forecast for the 2Q24 earnings season (annual growth)

EPS means earnings per share

SPS means sales per share

Source: Goldman Sachs – Facset

Consensus estimate for the 2Q24 EPS growth of +9% is the highest since 2021

Source: Goldman Sachs – Facset

As we approach the start of the second half of the year, we highlight the strong performance of the S&P 500, which has accumulated gains of approximately 15%. This performance primarily reflects optimism around artificial intelligence (AI), resilience in corporate earnings, and expectations of a potential Federal Reserve (FED) reference rate cut. Here are the key events that investors will be watching closely for the remainder of the year:

2Q24 and 3Q24 Earnings Season: Second-quarter earnings season is scheduled to begin during the second week of July, led by JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C). Annual earnings growth of 8.8% is estimated for S&P 500 companies, marking the highest rate since the first quarter of 2022 (+9.4%). For the third quarter (3Q24), potential growth of 8.2% annually is forecasted, which could lead to an 11.3% annual increase in corporate earnings for the full year 2024.

Other Geopolitical Events: The United Kingdom will hold early elections on July 4, determining the composition of its Lower House, and ultimately the country’s next government. In France, the second round of parliamentary elections will be held on July 7, where the far-right Rassemblement National (RN) party won a historic 31.4% of the vote for the European Parliament, beating the 14.6% obtained by Macron’s party.

Boom in Artificial Intelligence (AI): More than 18 months after the launch of ChatGPT, the growing adoption of AI has significantly boosted the markets. Companies such as Microsoft, NVIDIA, Apple, Alphabet, Amazon, and Meta have contributed 64% of the global stock market’s total return since then. In June, NVIDIA became the world’s largest publicly traded company. This growth suggests that capital expenditure (CAPEX) in AI could continue in the coming months, further strengthening earnings growth for the sectors involved, such as semiconductors, which could grow 50% this year and 25% by 2025. As the AI ecosystem grows, it is estimated that CAPEX for developers could reach US$331 billion by 2027.

Interest Rate Cuts: Slower economic growth and expectations of a slowdown in inflation could lead to further rate cuts by central banks such as the Swiss National Bank, ECB, and Bank of Canada. On the other hand, the Bank of England’s first cut is projected to be in August, and the FED is expected to implement its first 25 basis point cut on September 18.

U.S. Presidential Elections: On November 5, U.S. voters will decide the outcome of the presidential election. Democratic President Joe Biden and former Republican President Donald Trump will face off in key debates scheduled for June and September. Current polls show a slight advantage for Trump, although a significant proportion of voters are still undecided. Historically, election years have tended to generate positive returns in the markets, with the S&P 500 posting an average historical return of 10.1% since 1937.

Some key dates for the second half of 2024

Source: UBS