U.S. stocks ended slightly down on Monday after a volatile trading session, with investors bracing for a decisive week as the nation prepares to choose its next president and the Federal Reserve gets set to release a key policy statement.
In the final hours of the presidential race, candidates Donald Trump and Kamala Harris pulled out all the stops in an effort to secure crucial votes. Polls show a close race, and it may take several days to determine the winner.
Some of the so-called "Trump trades" faced declines after recent polling showed Harris, a Democratic vice president, leading in Iowa. This led to a dip in the U.S. dollar, Treasury yields, and Bitcoin. Meanwhile, Trump Media & Technology Group (DJT.O) ended up with a 12.37% gain, recovering from early losses of nearly 6%.
Following the Iowa poll, Harris's odds against the former Republican president increased on several betting sites, which many market participants view as a predictor of election outcomes.
"We'll need until at least Thursday to determine who won, so unfortunately, this week will likely be quite volatile," said Sam Stovall, chief investment strategist at CFRA Research in New York.
"Earnings are doing well, the Fed will likely lower interest rates, and the only true uncertainty is the election. Hopefully, it will be resolved sooner rather than later, so investors can get back to business as usual," Stovall added.
On Monday, major U.S. stock indexes slid into the red. The Dow Jones Industrial Average (.DJI) fell by 257.59 points, or 0.61%, closing at 41,794.60. The S&P 500 (.SPX) also declined, losing 16.11 points, or 0.28%, to settle at 5,712.69. The Nasdaq Composite (.IXIC) joined the downtrend, shedding 59.93 points, or 0.33%, and ending at 18,179.98.
On the bond market, ten-year U.S. Treasury yields took another hit, falling 6.4 basis points to 4.299%, following an initial drop of 10 basis points. Investors anticipate a volatile week as they await election results and policy clarity.
With bond yields declining, the Russell 2000 (.RUT) saw a modest 0.4% increase, as lower borrowing costs tend to benefit small-cap stocks, which are seen as more likely to gain from lower rates.
The CBOE Volatility Index (.VIX), known as Wall Street's "fear gauge," climbed to 21.94, staying well above its long-term average of 19.46. It hovered near last week's two-month high of 23.42, reflecting heightened market tension over the pending election and potential economic fallout.
Heading into Thursday, investors are almost certain the Federal Reserve will cut the benchmark interest rate by 25 basis points. According to CME's FedWatch tool, there is a 98% chance of a rate cut and only a 2% chance the Fed will hold rates steady. This expectation has been priced into the market, heavily influencing investor sentiment.
Among the S&P 500's 11 major sectors, energy (.SPNY) led the way, gaining 1.87%, buoyed by a rise in oil prices following OPEC+'s decision to postpone production hikes.
Chipmaker Nvidia (NVDA.O) saw a modest 0.48% gain after news that it will replace Intel (INTC.O) in the Dow Jones Industrial Average. In response, Intel's shares dropped 2.93%, weighing on the Dow.
Hotel operator Marriott International (MAR.O) declined by 1.59% after lowering its 2024 profit forecast due to weak domestic travel demand in the U.S. and China.
Constellation Energy (CEG.O) performed the worst in the S&P 500, down 12.46%. The Federal Energy Regulatory Commission denied a deal to expand capacity at Amazon's data center, which is directly connected to Talen Energy's nuclear plant in Pennsylvania, pressuring the utilities sector, which fell 1.21%.
On Monday, advancers outpaced decliners on the New York Stock Exchange by a ratio of 1.37 to 1, while on the Nasdaq, the ratio was a narrower 1.01 to 1 in favor of gaining stocks, suggesting a mild overall bullish sentiment despite general caution.
The S&P 500 registered 10 new 52-week highs and four new lows, reflecting positive expectations in select sectors. Meanwhile, the Nasdaq Composite saw 66 new highs but also 128 new lows, highlighting heightened volatility among technology and innovation stocks.
U.S. trading volumes reached 11.31 billion shares, just under the 20-day average of 11.71 billion. This may indicate a cautious stance among market participants ahead of major events like the Fed meeting and presidential election.
Shares of Air France KLM (AIRF.PA) fell after Morgan Stanley downgraded the airline from "equal weight" to "underweight." On Tuesday, the stock dropped roughly 2% at the start of the trading session.
Morgan Stanley noted that while Air France KLM's stock isn't overly expensive by historical standards, it trades at a notable premium to its peers among national carriers. This premium, combined with challenging free cash flow prospects, suggests a cautious outlook for the airline.
Despite economic challenges, many European companies are surpassing low market expectations for third-quarter earnings, with investors rewarding top performers. However, concerns over weak demand in China continue to temper enthusiasm, prompting caution.
Data from LSEG I/B/E/S shows that analysts revised down profit growth expectations by 380 basis points in the two months before the earnings season. Normally, such adjustments are around 100 basis points, but the substantial drop in projections has made it easier for companies to exceed expectations.
So far, around 50% of companies in the STOXX 600 (.STOXX) index have reported their earnings, with approximately 56% exceeding forecasts. Citi equity strategists note that this figure aligns with the quarterly average, indicating that European firms are holding steady despite market turbulence.
The upcoming U.S. elections add another layer of uncertainty, with analysts expecting that the resulting volatility could continue to impact European stocks as investors wait to see how the election outcome might influence the global economy.
This quarter, companies that have exceeded expectations are being notably rewarded by investors. On the other hand, those missing forecasts are feeling the pressure as the market takes a tougher stance on underperformance.
European banks have enjoyed another strong quarter as persistently high interest rates continue to support profit margins. Even as the European Central Bank signals potential rate cuts, investor sentiment remains positive.
"Interest rates will structurally remain higher than in previous cycles," remarked Thomas McGarrity, head of equity at RBC Wealth Management. He believes this will benefit banks significantly, allowing them to sustain strong margins. "We're in a favorable position and won't be backing down," McGarrity added.
Data from LSEG I/B/E/S shows that the financial sector saw 20.6% profit growth in the third quarter, ranking it third among major sectors after utilities and basic materials. So far, 80% of financial companies have reported earnings that beat analyst expectations.
Meanwhile, Europe's economy remains in a state of stagnation. The industrial sector, particularly reliant on energy, faces challenges from rising costs and weak global demand. For small- and mid-cap companies focused on the domestic market, these issues create significant headwinds and unstable growth prospects.
Currently, European stocks remain historically undervalued. The average 12-month forward P/E ratio stands at 13.6x, lower than the long-term average of 14.3x. Mid-cap stocks appear even more attractive, trading at a forward P/E of 12.7x compared to the long-term average of 15x. This undervaluation makes European assets appealing to investors seeking growth potential in stable markets.
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