Stock investors are navigating through unpredictable events and mixed market signals. Patience and composure are essential qualities as they face challenges like the intense U.S. presidential race, improving European earnings, and increasing bond yields. The market is torn between hedging against declines and pursuing gains, with major indices cooling off but not showing signs of a deeper correction.
Sector performance offers little guidance, as volatility in large tech companies has weakened market momentum. Lower-quality sectors, such as unprofitable tech stocks and heavily shorted stocks, are underperforming, while stocks benefiting from inflation, stagflation, and economic growth are leading the gains.
Recently, U.S. market volatility has increased. Although the S&P 500's record highs this year were mostly during low VIX index periods, recent records have come with larger price swings. This is not necessarily alarming. According to Tier 1 Alpha strategists, increased volatility in a bull market may indicate a maturing rally, paving the way for potential rebounds dependent on uncertain events, especially the U.S. election. Historical trends suggest volatility may decrease as the election approaches, though current uncertainty is high.
Monica Defend, Chief Strategist at Amundi, highlights the need to await post-election clarity on policy implementation, considering Congress's stance. Meanwhile, corporate earnings are improving. The first major day of the European earnings season concluded with approximately €1.4 trillion ($1.52 trillion) in market value reported. Strong performances from Hermes International SCA and Unilever Plc suggest positive trends in luxury and consumer goods, demonstrating profitability despite revenue challenges.
Investors are rewarding strong performers without severely punishing underperformers. Christoph Mertens of Fuerst Fugger Privatbank AG notes that low expectations allow surprises, with some companies taking advantage. Marc Decker of Merck Finck observes that 74% of U.S. companies and about half of European firms have exceeded earnings expectations, with large tech companies' data being crucial yet challenging to predict.
Despite high valuations and investor expectations in the tech sector, a complete rotation away from these companies has not occurred. Market trends remain event-driven, and instability is likely as traders respond to headlines. While hedge positions may limit losses, the unknown impact of earnings, the U.S. election results, and interest rate directions could create year-end chaos.
Mertens advises maintaining optimism while diversifying investments and keeping cash ready for opportunities, as significant market movements are expected soon.
