INSIGHTS

On October 23, 2024

Potential Impact of the November Elections and Investment Opportunities

In the third quarter of 2024, the S&P 500 Index finally broadened beyond the Magnificent Seven. We have been anticipating this wider participation for nearly three quarters. More than 60% of the S&P 500 Index components beat the index for the period compared to only 25% in the first half of 2024. Also, eight of the 11 industry sectors outperformed the index. The S&P 500 Equal Weight Index was up 9.1% versus 5.5% for the market-cap-weighted S&P 500.

The Federal Reserve cut interest rates 50bps (basis points) in September for the first time in four years. As seen below in Table 1 the top two best performing sectors for the quarter were Utilities and REITs (real estate investment trusts), both interest rate bond proxy sectors. The worst performing sectors were Energy, Information Technology, and Communication Services. Oil prices slumped 17% on weak global demand. Technology stocks faded after a torrid start to the year as investors gravitated toward value stocks. Along those lines, the dividend-paying cohort of the S&P 500 Index (regardless of yield) rose about 10% and the non-payer cohort rose 7%. Dividend-oriented strategies generally had returns that ranged from 7% to 9% in the third quarter, outpacing the S&P 500 Index. Inflows into dividend-oriented funds reached a 24-week high during the quarter. 

Elections on the Horizon

The November presidential elections are looming. In our previous commentary, the race was expected to be President Joe Biden versus former-President Donald Trump. However, with a new candidate in the mix, we are frequently asked what the potential investment implications would be for a Kamala Harris or Donald Trump victory.

First, it’s important to remember that the Senate and House races generally have more impact on policy enactment. Current projections have the Senate leaning Republican and the House leaning Democrat, indicating a gridlocked Congress may be the outcome. Keep in mind, not all Biden policies passed despite Democrats controlling both the Senate and the House on his inauguration day. The Trump tax cuts of 2017 are set to expire at the end of 2025, including most provisions. Some, like the child tax credit, have bipartisan support. However, the corporate tax rate may rise but likely not to the prior 35% levels. The corporate stock buyback tax of 1% has not influenced a slowdown in buybacks, so it is unlikely to be eliminated. Some proposals — like no tax on tips — seem to have bipartisan support though others — such as taxing unrealized capital gains — seem unlikely to gather traction. Ultimately, it’s health care spending that constitutes a large part of gross domestic product (GDP), while also falling under heavy government oversight. The Affordable Care Act, however, seems entrenched now. The hot topic is drug prices, but that too appears unlikely to change as Medicare uses its buying power. Weight-loss drug prices are getting more scrutiny, but the broadening potential of therapeutic benefits in cardiovascular, kidney, and dementia improvements makes it harder to challenge.

Outlook on the Economy and the Stock Market

U.S. GDP has remained resilient with growth in the 2–3% range with a normalizing labor market. While hiring has slowed, layoffs (as measured by jobless claims) remained low. Consumers at all levels have been more selective in their spending as inflation eats away at their purchasing power. The recent interest rate cut appears preemptive as the labor market could deteriorate quickly.

Earnings for the S&P 500 remain driven by the Magnificent Seven. 2024 could see almost 10% growth in earnings. However, when decomposed further, Magnificent Seven companies are estimated to average 20% growth while the remaining companies of the S&P 500 Index are estimated to show 2.5% average earnings growth. By 2025, index earnings may approach 15%: 19% average growth from Magnificent 7 and 14% growth from the remaining.

All said, the stock market’s valuation of 21x forward PE (price/earnings ratio) seems rich, especially if the economy falters. However, lower interest rates may be the market’s saving grace as they potentially entice fixed income investors to rotate into income stocks.

Brentview currently favors several secular macro growth themes including Artificial Intelligence (AI), GLP 1s (GLP-1s, or glucagon-like peptide-1 receptor agonists, are a class of drugs used to treat type-2 diabetes and obesity), energy and infrastructure. More specifically, the AI value chain theme has ample indirect legislative support as AI’s biggest constraint is the lack of large-scale power sources. The recent passing of the Investment in Infrastructure & Jobs Act (IIJA) and the Advance Acts supported the revitalizing of clean energy, specifically nuclear. To this end, we are bullish on utilities, especially those with renewables and existing nuclear fleets. Furthermore, we are constructive on Health Care, as history has shown that this sector often does well after an initial interest rate cut. We also like Industrials and Materials sector exposure to participate in an upswing in infrastructure spending. Like AI & Nuclear, we believe infrastructure spending is a necessity to maintain our global competitive position.

CRN: 2024-1004-12032 R

The opinions and views of this commentary are that of Brentview Investment Management and are not necessarily that of Advisors Asset Management.

Any forecasts or opinions expressed herein are Brentview Investment Management's own as of October 22, 2024 and are subject to change without notice. This information may contain, include, or is based upon forward-looking statements. Past performance is not indicative of future results.