With the U.S. presidential election and the next Fed interest rate decision expected in five weeks, there will be a sea of news and issues to consider and digest in the upcoming third quarter (3Q) earnings season, which will kickstart next week with banks on the cards.
1. Bank 3Q Earnings Could Face Pressure
While rate cuts are generally positive for stocks, banks have recently struggled. The SPDR S&P Bank ETF (NYSE:KBE) underperformed the S&P 500 significantly in September. Part of this weakness came from downbeat commentary from JPMorgan (NYSE:JPM) on net interest income and expense expectations. With uncertainty around rate cuts and the economy, interest rate cuts could lead to near-term pressure as loan demand “normalizes”, potentially affecting banks and the financial sector.
2. Election-Related Market Volatility
A wrinkle to pay attention to as the earnings season ramps up is the U.S. presidential election. Historically, the lead-up to the election tends to come alongside some short-term weakness. Looking at the past five U.S. elections, September and October tend to be very weak months, with October often being the weakest month of the calendar year during an election. Only one of the past five election years has seen October end positively, with an average performance of -4.4% in that span. While past performance is not indicative of future performance, it is something that investors should keep in mind.
3. Sector-Specific Impacts of Election Outcomes
The outcome of the U.S. presidential election could impact certain sectors in the short term, separate from earnings. For example, a win for Vice President Harris could boost homebuilders, with Harris having proposed a $25,000 down payment assistance that could increase demand for homes. Conversely, Trump’s tariffs could benefit steel producers like Steel Dynamics (NASDAQ: STLD).
The U.S. presidential election presents a wrinkle for investors, with stocks normally seeing some weakness ahead of the election. Rate cuts could continue to weigh on banks in the short-term. Investors should prepare for volatility with many moving pieces in the market. Caution and attentiveness are advised during this period.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of any companies mentioned.
