Investors in the stock market are currently grappling with unpredictable outcomes and confusing signals. Given the present scenario, waiting for clearer indications before making investment decisions might be the best approach. The tense atmosphere surrounding the U.S. elections, a mixed start to European earnings reports improving, and the persistently rising interest rates are creating a dilemma for the market, caught between hedging against declines and preparing for an upswing.
The momentum of major stock indices is slowing, yet there's no clear turn into negative territory. There are no signs of a deeper correction developing from the current consolidation. It is challenging to find clues from thematic positioning. Major tech companies have recently experienced volatility, weakening their strong upward drive. Lower-quality market segments, such as unprofitable tech stocks and heavily shorted shares, have performed poorly. Conversely, stocks expected to benefit from inflation and stagflation, along with cyclicals, are leading the gains.
Recent market volatility has increased. While most record highs for the S&P 500 this year occurred during low VIX index periods, recent peaks have been accompanied by greater price swings. According to Tier 1 Alpha strategists, heightened volatility during a bull market is not necessarily worrisome but an indication of a mature rally.
This sets the stage for a potential rebound, highly dependent on the outcomes of several critical events, most notably the U.S. elections. Historically, volatility tends to decrease in the days leading up to the election. However, the range of potential outcomes appears broader than ever. Post-election clarity on policies and Congressional support will be crucial.
Earnings season dynamics are also evolving. Strong performances from companies like Hermès and Unilever (UL, Financial) indicate positive news in luxury and consumer goods sectors. Despite revenue challenges, companies continue to generate profits. Investors are rewarding strong performers while not significantly penalizing those with weaker results.
Merck Finck's Marc Decker notes that 74% of U.S. firms exceeded earnings expectations, while about half of European companies did the same. The data from major tech companies remain a crucial, yet uncertain, pivot for earnings. Investors are exploring alternatives outside major tech firms, although they haven't fully shifted away from the tech sector.
Market direction remains event-driven, with potential instability as traders react to news. Hedging strategies may limit losses, but the unknown impacts of earnings, election outcomes, and interest rate trends could create chaos by year-end.
Fuerst Fugger Privatbank AG's Christoph Mertens suggests staying optimistic but well-diversified. Keeping cash ready for potential opportunities could be advantageous, as significant market moves are expected in the coming days.
