As the US election cycle nears its end, market analysts are observing conditions that could lead to a year-end rally in equities.
UBS suggests that the resolution of electoral uncertainty could boost market confidence. Historically, November and December have been favorable months for stock performance, and the current economic landscape suggests that this trend may continue if key uncertainties are resolved. The outcome of the election is a critical variable, as it could lead to a reduction in implied volatility and encourage investors to take on more risk.
Recent economic data indicates a resilient job market and strong consumer spending, which contributed to third-quarter GDP growth. The US economy appears to be on a stable trajectory, with consumer spending remaining robust. The Federal Reserve's stance, including anticipated rate cuts, could cushion any economic downturn. Global fiscal and monetary policies, as well as investor positioning, are also expected to contribute to market momentum.
However, there are risks to the year-end rally, such as a prolonged delay in election results, labor market weakness, inflationary pressures, and the expiration of a temporary budget deal. Despite these risks, UBS's analysis suggests that conditions are aligning for a potential seasonal rally, with the upcoming election viewed as a "risk-clearing event." Even if a year-end rally does not occur, the positive outlook for market performance over the coming year remains, driven by favorable conditions and themes such as artificial intelligence.
Investors are advised to remain vigilant and adaptable as political, economic, and global factors continue to shape market dynamics.