Stock markets defy US elections: Year-end rally in sight

Despite the upcoming US elections, the momentum on the stock markets remains unbroken. The upward trend is intact - and the seasonally strongest phase of the year is now beginning. The usual drivers include payments into private and occupational pension schemes as well as Christmas business, which brings companies higher sales. The environment for equities remains supportive thanks to a robust economy, pronounced interest rate cuts worldwide, loose financial conditions and an expansive fiscal policy. Although earnings growth in the US was rather modest at 3% year-on-year in the third quarter, companies once again surprised positively with their earnings reports.

The stumbling block: high valuations

However, we are concerned about the valuation. With a price/earnings ratio (P/E) of 25, the leading US index S&P 500 is historically priced extremely high. This is all the more true given the sporty earnings estimates of 14% for 2025. The equity risk premium is therefore negative again due to the recent rise in yields in the US. Sentiment is also becoming more euphoric. Investors are hardly hedging their bets, only a few still expect a recession and many have bought equities at the expense of liquidity and bonds. What weighs heavier? The positive factors outweigh the negative, as overheating - such as in 1999 with a flood of new financial products in the technology, media and telecommunications sectors - has not (yet) materialised. We therefore expect further price gains in equities until the end of the year and remain overweight.

US debt tower - higher and higher

We are maintaining our underweight position in bonds due to the very low credit risk premium and the still unattractive Swiss government bonds. We also remain cautious on US government bonds. This is because government debt there is likely to continue to rise regardless of the outcome of the presidential election. We favour government bonds from the eurozone, where debt and economic growth are weaker.

How do we currently assess the financial markets and how are we positioned?

Swiss equities with disappointing earnings momentum

• The broad Swiss share index SPI is not making any headway and has been trending sideways since June. Its defensive nature and the negative impact of the strong Swiss franc are currently making the domestic market unattractive.
• While corporate profits in the US are picking up again, growth in Switzerland remains subdued. The stagnation of the heavyweight Nestle (0% expected profit growth in 2025) is hardly having a stimulating effect.
• We are reducing Swiss equities to neutral.

Favourable US banks with strong price/earnings momentum

• US bank profits in the third quarter were around 10% higher than analysts had expected. As a result, share prices continued their upward trend, with the upward revisions being very high compared to the market as a whole.
• Despite the already impressive gains (32% since the beginning of the year), the banking sector remains relatively favourably valued (P/E ratio of 13 vs. 25 for the SPX).

The strong US dollar is becoming a burden for emerging market bonds

• Since March 2022, we have held an overweight position in emerging market bonds at the expense of global government bonds. Since then, we have achieved an outperformance of 19%. This proved to be one of our best bond trades.
• Now the wind seems to be changing somewhat, prices are suffering from the stronger US dollar and a trend reversal seems possible.
• While the cycle of interest rate cuts in Asian countries is still to come, South American countries such as Brazil have already raised interest rates again.
• As real yields remain very attractive and debt dynamics appear to be better under control than in some industrialised countries, we are maintaining our position. However, we are halving our overweight and thus taking some of the profits.

Tactical Asset Allocation in November 2024