And Then There Were Only 6 Left, USA: Presidential Cycle and Possible Trump Election, Earnings Reports Surprise to the Upside.

Chart of the week

The chart shows the average return of the S&P 500 since 1950 during the fourth year of a US president’s term, either when the president is running for re-election (orange) or when the president is in the 8th year of office and can no longer run again (blue).

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Why this matters

Since Joe Biden is running for re-election, we are currently in the scenario represented by the orange line.

At present, it is expected that there will once again be a showdown between Joe Biden and Donald Trump.

Over the past few weeks, we have often been asked what a Trump presidency could mean for the stock market. Personally, we do not see much positive in a Trump election, but this report is intended to provide a sober analysis of the possible outcomes.

Among the points included in Trump’s election platform are:

• Reduction of 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)
  

These points suggest that the stock market could react very positively to a possible victory by Donald Trump. Trump would provide one economic boost after another. However, while this could be very positive over a one-year period, all of these measures also carry the risk of significantly higher inflation in the years that follow.

For the rest of the world and for companies outside the USA, another Trump presidency would not be welcome. Trump wants to end the role of the USA as the world’s policeman. Even if this could be positive in the long term, the short- and medium-term disadvantages are likely to outweigh the benefits. It could create a power vacuum and lead to additional conflicts.

One example of this: since the USA transformed itself from an oil importer into an oil exporter through fracking, the country has increasingly withdrawn from the Middle East and shifted its focus toward the Pacific region. In the resulting power vacuum, Iran and Saudi Arabia have attempted to fill the gap. Both have done so by arming militias aligned with their interests. The war in Syria and now the conflict in Israel are consequences of this development.

And Then There Were Only 6 Left

2023 was a remarkable year. Almost all of the returns of the S&P 500 came from just 7 major companies: NVIDIA, Meta (Facebook), Google, Microsoft, Amazon, Apple, and Tesla.

The S&P 500 has gained 3% so far in January after an initially weak start. However, if the index were equally weighted instead of market-cap weighted, the return would only be -1%. So far, the year has continued exactly where it left off. A small number of stocks have driven the entire index higher.

BUT, in 2024 there are only 6 left instead of 7.

The outstanding performance of the so-called Magnificent Seven was not simply driven by hype. All seven companies repeatedly surprised investors with stronger-than-expected earnings. Last week, Tesla left the group after declining profits led to a loss in value of 25% since the beginning of the year.

Between January 29 and February 2, most of the companies mentioned above will publish their results. That will show whether even more companies will drop out of the group.

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Earnings Reports Surprise to the Upside

‍The chart below requires a bit of time to understand, but it is worth the effort. The chief strategist at the traditional bank Fidelity is notorious, but also highly respected, for his complex charts.

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

At the end of 2023, an average earnings increase of 1.09% was expected for the fourth quarter. Currently, expectations stand at 1.78% (pink). For the first quarter of 2024, an increase of 6% (light blue) is expected, for the second quarter 10% (green), and for the third quarter 17% (dark blue).

So far, 52 companies have reported earnings, of which 87% exceeded estimates by an average of 8.22%. This is normal and suggests that further positive news from companies may follow.

The chart also provides important information for investors in individual stocks. A cycle can be identified. Between weeks 10 and 6 before the end of the quarter, expectations are often significantly reduced, reaching their lowest point at the end of the quarter, before companies then positively surprise investors with the actual reported figures.

This cycle is based on legal requirements. If a company’s revenue were to fall by half and it only informed investors on the 25th day of the following month after the quarter ended, it would almost certainly face regulatory action. Market-relevant information must be disclosed immediately. And if revenue has been cut in half, this is usually already foreseeable after two-thirds of the quarter has passed. Therefore, the company must inform the market at that point, which is typically 10 to 6 weeks before the end of the quarter.

So, if a company unexpectedly announces a press conference 10 to 6 weeks before the end of the quarter, investors should be cautious and possibly consider selling as a precaution. Companies must also disclose positive developments, but they tend to be more cautious about doing so because conditions could still worsen before the quarter ends, and they prefer to positively surprise investors during the official earnings release. Therefore, when a press conference is announced 10 to 6 weeks before quarter-end, the probability of negative news is generally higher than the probability of positive news.