【MACRO Insight】Is the U.S. stock market facing a 'summer storm'? Financial giants are assessing the potential impact of the election on the bond market!

Although the U.S. stock market is typically stable in the summer, this year it may face volatility, maintaining an optimistic outlook for the S&P 500 index's year-end target of 5,600 points. At the same time, financial giants are assessing the potential impact of a Trump election victory on the bond market, advising clients to prepare for inflation and rising bond yields. Despite uncertainties, earnings growth is seen as key to supporting the rise in the stock market. Investors need to pay attention to upcoming significant economic and political events, as well as signs of a slowdown in the U.S. economy.

Citigroup's equity analyst, Scott Chronette, warned that although the U.S. stock market is usually more stable in the summer, it may encounter some fluctuations this year, which he likened to a “summer storm.” He listed several factors that he believes could lead to a market pullback. Nevertheless, Chronette remains optimistic about the S&P 500 index, expecting it to reach or approach the target price of 5,600 points by the end of the year. This expectation was first proposed in June when the market was in a phase of rapid rise.

Chronette pointed out that the current valuation levels of the U.S. stock market are relatively high, which could be a factor in market instability. According to Citi's analysis, high valuations tend to limit future returns. Currently, the S&P 500 index's forward price-to-earnings ratio is 21.1, higher than 90% of the time over the past 40 years. Historical data shows that with valuations this high, the median expected return for the index over the next year is typically -4%.

However, despite the high valuations, investors' enthusiasm for U.S. stocks has not waned. An investor sentiment indicator from Citi shows that the market sentiment remains optimistic. In addition, the Chicago Board Options Exchange Volatility Index (VIX Index) is also at a low point since 2019, indicating that the market is sensitive to potential negative news.

Chronette also mentioned some potential risks that could shock the market, including the U.S. election in 2024, the risk of inflation data exceeding expectations, and geopolitical concerns. These factors have already led to short-term selling in the stock market earlier this year.In the financial world, some heavyweight financial institutions are reassessing the potential impact on the bond market if Trump wins the November election. Wall Street strategists, after the most recent debate, see the prospect of Biden's re-election becoming less clear, and therefore they advise clients to prepare for the possibility of sustained inflation and an increase in long-term bond yields.

U. S. Treasury bonds fell on Monday, with yields rising to multi-week highs, which traders attributed to the ongoing impact of the increasing possibility of Trump's re-election. Giants such as Goldman Sachs, Morgan Stanley, and Barclays are assessing the potential impact of Trump's victory in the November election on the bond market. Wall Street strategists advise clients to prepare for possible inflation and an increase in long-term bond yields. In addition, after the Supreme Court's ruling on Trump's case, the decline in U.S. Treasury bonds further widened, a ruling that may limit the possibility of Trump being prosecuted before the November election for attempting to overturn the results of the 2020 election.

Investors like Jack McIntyre from Brandywine Global Investment Management are watching market movements, concerned that Biden's debate loss could trigger a bond market sell-off. U.S. Treasuries fell after the debate, with yields rising, reflecting the impact of the possibility of Trump's re-election. However, not all strategists believe that an increase in long-term Treasury yields is inevitable. Goldman Sachs strategists pointed out that investors' focus may shift to the risk of increased tariffs, which could put pressure on the economy.

Casey Jones from Charles Schwab believes that due to the unclear composition of Congress after the election, there is uncertainty about the impact of Trump's policies on the market, and policy changes after the election may be the biggest risk to the Treasury market. She emphasized that it is too early to predict market reactions, as the commitments of the presidential candidates need to be approved by Congress to be realized. Despite facing many uncertainties, Chronette believes that the earnings growth of S&P 500 constituent companies will be the key factor to support the market's further rise.

In the meantime, investors are about to enter a period of strong performance in the history of the U.S. stock market. Analysis from Goldman Sachs shows that in the first two weeks of July, the S&P 500 usually has a gain of more than 2%. Data from FactSet shows that at the beginning of July, major U.S. stock indices performed strongly. The S&P 500 rose 0.1% on Monday, closing at 5,475 points; the Nasdaq Composite Index rose 0.8%; the Dow Jones Industrial Average rose 0.1%; while the Russell 2000 Index fell 0.8%, and market volatility may increase in the summer.

Carrie Cox, Chief Market Strategist at Ritholtz Wealth Management, pointed out that in the summer, the S&P 500 usually experiences several single-day declines exceeding 1%. The market has been relatively calm since April, and if it can be maintained until Labor Day, it will be the calmest summer since 1979.

Despite the lower trading volume in the summer, the market still needs to pay attention to a number of important events, including employment reports, inflation data, the Federal Reserve's interest rate decisions, and corporate earnings reports. In addition, investors are also concerned about the upcoming presidential election and economic data, with recent data showing that the U.S. economy may be slowing down.