Market report

And then there were only 6, USA: Presidential cycle and possible election of Trump, earnings reports surprise positively.

January 29, 2024
4 min.
And then there were only 6, USA: Presidential cycle and possible election of Trump, earnings reports surprise positively.

Chart of the week

Source: Isabelnet, 26.01.2024

The chart shows the average return of the S&P 500 since 1950 in the fourth year of a US president when they are up for re-election (orange) or when they are in their 8th year in office and can no longer run (blue).

Why this is important
Since Biden is running for re-election, we have the case shown by the orange line.

At the moment, it can be assumed that there will be another duel between Biden and Trump.
We have often been asked in recent weeks what an election of Trump as president would mean for the stock market.
Personally, we cannot see much upside to Trump's election, but this report is about a sober analysis of the possibilities.

Trump's election program includes, among other things:

- Reduce corporate taxes by 10% (very positive for the economy)

- Introduction of a 10% tax on all imports (very positive for companies in the USA)

- Reduction of bureaucracy (positive for companies and the economy)

- America First: Bringing production back to the USA (lower unemployment, but higher costs)

The points suggest that the stock market could react very positively to a possible Trump win. Trump would give the economy one boost after another. As positive as this would be over a one-year period, all of these measures carry the risk of massively higher inflation in the years thereafter.
For the rest of the world and all companies outside the USA, another Trump presidency would not be a good thing. Trump wants to end the USA's role as the world's policeman. Even if this could be positive in the long term, the disadvantages outweigh the advantages in the short and medium term. It could lead to a power vacuum with additional conflicts.

One example: since the USA went from being an importer of oil to an exporter with oil fracking, it has increasingly withdrawn from the Middle East and turned its attention to the Pacific. In the resulting power vacuum, Iran and Saudi Arabia are trying to fill the gap. Both are trying to do this by arming militias that suit them. The war in Syria or now in Israel were the consequences.

And then there were only 6
2023 was a remarkable year. Almost the entire return of the S&P 500 came from just 7 large companies: Nvidia, Meta (Facebook), Google, Microsoft, Amazon, Apple and Tesla.

Source: Twitter, Charlie Bilello, @charliebilello, 25.01.2024

After initial weakness, the S&P 500 has gained 3% so far in January. If the index were not capital-weighted but equally weighted, the return would only be -1%. So far, the year has continued exactly as it left off. A few stocks have driven up the entire index. BUT, in 2024 there are only 6 and no longer 7.

The outstanding returns of the so-called Magnificent Seven were not simply plucked out of thin air. All seven companies repeatedly surprised with higher profits. Last week, Tesla left the group. Falling profits led to a 25% drop in value since the beginning of the year.
Most of the companies mentioned above will publish their results between January 29 and February 2. It will then become clear whether even more companies will leave the Group.

Profit statements surprise positively
The chart below requires some familiarization, but it's worth it. The chief strategist of the traditional bank Fidelity is notorious, but also appreciated for his complex graphics.

Source: Twitter, Jurrien Timmer, @TimmerFidelity, 25.01.2024

The chart shows the average profit expectation for companies in the USA from 39 weeks before the end of the quarter to 9 weeks after the end of the quarter. The vertical line symbolizes the end of the quarter, all data on the left are expectations, all data on the right are actual reported earnings.

At the end of 2023, an average profit increase of 1.09% was expected for the fourth quarter, currently we are at 1.78% (pink). An increase of 6% (light blue) is expected for the first quarter of 2024, 10% (green) for the second quarter and 17% (dark blue) for the third quarter.
So far, 52 companies have reported, 87% of which have exceeded estimates by an average of 8.22%. This is normal and gives hope for further positive news from the companies.

The chart also provides important information for investors in individual shares. A cycle can be recognized. Between the week 10-6 before the end of the quarter, expectations are often massively lowered, then reach the minimum at the end of the quarter, only to surprise positively when the actual figures are released.

This cycle is based on legal requirements. If a company's turnover halves and it reports this on the 25th of the following month after the end of the quarter, it is certain to face charges from the authorities. A company must disclose stock market-relevant information immediately. And a halving of turnover is already foreseeable after 2/3 of the quarter. It must therefore provide information at that time. And that is 10-6 weeks before the end of the quarter.

So if a company unexpectedly announces a media conference 10-6 weeks before the end of the quarter, you should be on your guard and possibly sell to be on the safe side.
Companies also have to announce positive developments. However, they are more reluctant to do so because the situation can still deteriorate by the end of the quarter and they would prefer to surprise on the upside when making the official announcement. With a media conference 10-6 weeks before the end of the quarter, the probability of a bad announcement is therefore higher than for a positive announcement.

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