Investing.com -- UBS said “conditions are aligning” for a seasonal year-end rally in US equities, though some risks still persist.
With the US election set to wrap up shortly, uncertainty around this event, coupled with several key economic factors, could set the stage for stronger markets in November and December, traditionally the best months for the S&P 500.
The election outcome remains a wild card but “just the resolution of uncertainty and reduction of volatility should be beneficial to markets in the near term,” according to Jason Draho, Head of Asset Allocation at UBS.
Regardless of whether it’s a “red sweep” or a divided government, lower implied volatility could prompt more risk-taking as investors gain confidence in a clearer landscape.
UBS’s outlook also factors in the US economy’s stable position. Recent data suggested a soft landing, with job growth showing resilience despite setbacks such as hurricanes and labor strikes.
Consumer spending remains strong, which contributed 2.5 percentage points to third-quarter GDP growth. This momentum is expected to persist, possibly bolstered by the resolution of election-related uncertainties.
Another supportive element comes from the Federal Reserve, which UBS describes as having a “put” on the market, implying that rate cuts could act as a cushion in any economic downturn.
Markets have priced in a 98% probability of a 25 basis point cut in November, with another possible cut in December, but UBS suggests one is less certain as nearly two months full of economic data will be released before that meeting.
“Perhaps the most important consideration affecting a year-end rally is that the jobs data was a reminder that the Fed “put” is alive and will be activated on any weakness,” Draho noted.
Globally, fiscal and monetary policies outside the US could also add to market momentum. For instance, China is anticipated to announce further fiscal support soon, which may depend on the US election results, particularly if tariffs return under a Trump victory.
Other central banks are expected to contribute to the global rate-cutting trend before year-end, giving additional lift to the market sentiment.
Meanwhile, investor positioning appears balanced, with UBS indicating that “investors appear to have de-risked last week ahead of the election.” This, Draho points out, positions the market for potential gains if the election outcome aligns with expectations, allowing investors to add risk and chase a rally.
However, several risks persist. UBS highlights that a prolonged delay in election results could stall the rally, reminiscent of the 2000 US election, when the outcome remained uncertain until December.
Moreover, concerns about labor market weakness or inflationary pressures could challenge the soft-landing narrative. A temporary budget deal expiring on December 20 also raises the specter of a government shutdown, which could trigger volatility, though UBS suggests investors may largely overlook this risk.
In UBS’s view, “conditions are aligning for the normal seasonal rally, though one is far from assured.”
The election is expected to be a “risk-clearing event,” while economic fundamentals, policy, and investor positioning help the markets grind higher.
“For equities, this could also mean a further broadening out of performance that began earlier in the fall,” UBS notes. “Even if such a year-end rally doesn’t materialize, these conditions, along with the AI theme, give us confidence that the markets will move higher over the next year.”