3 Key Factors That May Impact Q4 Returns

Mitch looks at 3 year-end factors to watch for their impact on Q4 returns—the U.S. elections, China’s stimulus policy, and corporate earnings.

3 Factors That Could Impact Fourth Quarter Returns U.S. stocks have delivered a banner year, with solidly positive returns registered across the size and style spectrum. The question is, what will the final two months of the year bring? Short-term returns are unpredictable. But I do have three factors I think could impact markets in this final stretch. Readers will note that the Federal Reserve is not one of them. In my view, the monetary policy factor is largely baked into stock prices, as there is no expectation that rates will move higher at the next two meetings.1 Setting the Fed and monetary policy aside for a moment, here are three year-end factors to keep in mind. 1. U.S. Elections The stock market does not like uncertainty, which makes U.S. presidential election years more vulnerable to volatility flare-ups. History shows a fairly consistent pattern. Stocks have been choppy in the weeks leading up to election day, then settle—and often rally—once the result is known. Indeed, the CBOE Volatility Index—also known as the VIX—tends to be higher (on average) in late October and early November in election years, versus non-election years.2 Given the tightness of the race and an overall process that could be more drawn-out than previous cycles, we might reasonably expect historical volatility trends to apply to November. But I do not think this alone should alter an investor’s positioning or outlook, which based on earnings and economic fundamentals remains constructive. Download Our Market Insights: October Stock Market Outlook Report As the election approaches, it’s easy to let emotions sway your investment choices. While market volatility can create uncertainty, it also brings opportunities. Our latest October Stock Market Outlook Report 3 is designed to help investors focus on the fundamentals. It includes valuable insights like: Capital markets commentary Key U.S. economic data Global market data Zacks S&P 500 earnings insights Zacks sector picks And more… Instead of getting caught up in election noise, rely on solid data and key indicators to guide your portfolio decisions. If you have $500,000 or more to invest, request our free October Stock Market Outlook Report 3 today! Investors may also be preparing for a specific outcome, as it is common in presidential election years for investors to assume their political party is better for the stock market. But history says the stock market goes up regardless of how power is divided. Political allegiance should not determine your investment strategy. Case-in-point, here’s the growth of $10,000 from 1943 to 2023: $311,766 – If invested only during Republican presidencies $1,212,746 – If invested only during Democratic presidencies $37,809,262 – Stayed invested regardless of which party controlled the White House Since 1950, there have been 18 presidential elections, and over that time U.S. GDP has grown at an average annualized pace of 3.2% with the S&P 500 annualized 9.4% per year. My advice for this final election stretch: recommit to being dispassionate, disciplined, patient, and focused on the long term. Even though it often feels like everything is riding on the outcome of the election, history reminds us that election results have not driven market results over the long term. The economy and corporate earnings do. 2. China Policy Stimulus Investors have long been eyeing China for signs that the world's second-largest economy is finally pivoting to more accommodative monetary and fiscal policy. Announcements in recent weeks have largely fallen short of expectations, but the magnitude of the stimulus may matter less than the direction. In September, the People’s Bank of China (PBOC) announced it would cut its benchmark interest rate and allow banks to hold less cash in reserves relative to deposit levels, which was designed to free up more capital for lending. Mortgage rates were also cut by 50 basis points, and $70 billion in loans were made available for funds, brokers, and insurers to buy Chinese stocks. Last week, commercial lenders cut their benchmark lending rates as well. Chinese shares have rallied in the wake of these decisions, but it may be that investors are feeling hopeful for a big policy decision that could arrive following the gathering of the National People’s Congress in the coming weeks. That’s where we could see a sizable fiscal stimulus plan that could tally in the hundreds of billions of dollars and would involve new debt issuance. Stay tuned. 3. U.S. Corporate Earnings It’s early in the Q3 earnings season, but the reports we’ve seen so far suggest that corporations are doing just fine. If we combine already-reported results with estimates for companies that are due in the coming weeks, total earnings for the S&P 500 index are expected to be up +3% from the same period last year on +4.7% higher revenues. The chart below shows the Q3 earnings and revenue growth pace in the context of where growth has been in the preceding four quarters and what is expected in the coming three quarters. Not too hot, not too cold. Quarterly Earnings and Revenue Growth Rate (YoY) Notwithstanding the modest growth pace in the third quarter, the aggregate earnings total for the period is expected to be a new all-time quarterly record, as the chart below shows. Total S&P 500 Quarterly Earnings (Billion $) Perhaps the most important feature of Q3 earnings season so far, however, is how estimates for the final quarter are holding up. Unlike the unusually high magnitude of estimate cuts that we had seen ahead of the start of the Q3 earnings season, estimates appear to be far steadier for Q4, as seen below. Total S&P 500 earnings are expected to be up +9.3% from the same period last year on +5.2% higher revenues. Evolution of 2024 Q4 Earnings Growth Estimates In the final two months, it will be essential to watch how the remaining corporations report for Q3, and what they say about expectations for Q4 and next year. Bottom Line for Investors Historically speaking, strong starts to the year for stocks tend to result in strong finishes. Fundamentals support equity markets in this particular year as well. Arguably the most bullish factor in today’s market is improving liquidity conditions, with nearly all major central banks all cutting rates and excess liquidity in the G10 at historic levels. If China takes bold action in the next few weeks, the case would become even more compelling. The U.S. presidential election is likely the factor that unsettles investors the most, which is understandable. But just remember that over time, the stock market responds more to long-term earnings trends and broad-based economic growth, not to changes in political leadership. Politicians come and go, but the desire to grow, innovate, and pursue profit remains a constant. To ensure you’re prepared for the journey ahead, I highly recommend our October Stock Market Outlook 4. This report provides a detailed analysis and practical strategies to help you navigate whatever lies ahead, covering key factors like: The Presidential election and economic policy Key U.S. economic data Global market data Zacks S&P 500 earnings insights Zacks sector picks And more… If you have $500,000 or more to invest, request our free October Stock Market Outlook Report 4 today! 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