Wall Street is counting on stocks to rally after election hurdle

A growing number of Wall Street strategists are predicting that a decision in the US presidential election will set the stage for stocks to rally into the end of 2024, building on a 21% gain this year for the S&P 500 Index.

Morgan Stanley’s Mike Wilson and JPMorgan Chase & Co.’s Dubravko Lakos-Bujas are among market watchers who said this week that the stock benchmark is poised to swing higher once a victor is declared. Meanwhile, Jefferies LLC strategists say equities weakness in the week before the vote has typically been a good omen for performance in the subsequent month, making last week’s slump a potentially bullish signal.

Of course, it’s anyone’s guess how long it will take to get a clear result after the vote ends Tuesday, for both the presidency and the makeup of Congress.

Vice President Kamala Harris and former President Donald Trump have been running neck-and-neck in the polls, which has helped curb risk appetite over the past few weeks. The US equities benchmark has held below last month’s record high, which it reached on momentum spurred by Federal Reserve interest-rate cuts, a resilient economy and the artificial-intelligence boom.

Bloomberg

While US equities are coming off their first monthly loss since April, the drop of less than 3% was more benign than the historical pattern of 4%-5% selloffs on average in October going into close presidential races, according to Deutsche Bank AG. Meanwhile, inflows to US stocks this year have been robust — roughly $500 billion — a sharp contrast from prior years when they kicked in only after the election, per data from the bank.

The call for a year-end rally has history on its side, as it tends to be a seasonally strong period for US stocks.

To Morgan Stanley’s Wilson, the election could serve as a “clearing event” that kicks off a year-end rush into stocks. He sees scope for the S&P 500 to reach 6,100 in that period, a roughly 5.5% gain from Tuesday’s close of 5,782.76.

At JPMorgan, Lakos-Bujas says the setup for equities looks solid through December once the presidential race is called. He expects confidence to grow and volatility to decrease, leading investors to unwind hedges and refocus on the Fed at a time when the economy and corporate earnings remain resilient, a combination that will drive further gains.

To be sure, the outlook for stocks also depends on what happens with Congress. Lakos-Bujas, for example, says that in a scenario where Washington is mired in political gridlock, stocks will do well regardless of who wins the presidency.

When it comes to the final weeks of presidential election years, how the S&P 500 fares in the days before the decision matters more than which party takes the White House, according to Jefferies strategists led by Andrew Greenebaum.

The firm’s analysis shows that if the market is rising in the trading week before Election Day, stocks tend to fall in the month after. However, if the S&P 500 is weak ahead of the event, performance is best, averaging roughly 4% into year-end. Last week, the US stock benchmark fell 1.4%.

And as conviction builds, they say, small-cap stocks present an opportunity, with those shares outperforming the S&P 500 after a presidential election concludes. In non-recession election years, the Russell 2000 Index has returned 7% on average in the subsequent eight weeks or so, based on data going back to 1980.

“Especially given the strong underlying economic backdrop and Fed shift toward lower rates, we think this could be one of the more compelling opportunities once the event is behind us,” Greenebaum wrote in a note to clients Tuesday.