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Despite the markets’ cautious stance to start the year and uncertainties surrounding the U.S. presidential election, we remain optimistic for the year ahead. Find out why we believe the earnings season should get better from here, election outcomes are not immediate concerns, and the Fed’s easing bias should provide support to the markets throughout the year.

Markets have largely maintained a cautious stance to start the year, primarily in response to a somewhat “weak-ish” start to the 2023 fourth quarter earnings season and the growing uncertainty around whether we have priced-in an excessive number of rate cuts.1 Indeed, at the end of 2023, markets were anticipating over six 25 basis points (bps) rate cuts for 2024, with the first expected in March.2 However, the strength in recent economic data – U.S. retail sales coming in much better-than-expected – and hawkish commentary from Federal Reserve members (Fed Governor Waller saying policymakers should move carefully) has prompted markets to re-price expectations, pushing out the initial cut to the May Federal Open Market Committee (FOMC) meeting, for a total of five cuts this year (Exhibit 1).3

Exhibit 1: Hawkish Fed-speak and robust economic data has pushed out rate cuts to only 5 this year

Additionally, an increasing number of headlines and conversations are pivoting towards the uncertainties surrounding the U.S. presidential election, given the conclusion of the Iowa caucuses and the upcoming New Hampshire primaries. Despite these uncertainties and mixed signals, we remain optimistic. We believe the earnings season should get better from here, election outcomes are not immediate concerns, and the Fed’s easing bias should provide support to the markets throughout the year.

Earnings – A Better Road is Likely Ahead:

The 2023 fourth quarter earnings season is off to a rather weak start, largely due to Financials which were the dominant sector reporting over the past week. The results have been underwhelming, with a negative 18.1% earnings surprise despite an earnings bar that had already been materially reset lower.4 That said, we do note that the earnings weakness had been expected out of Financials and that banks absorbed the FDIC’s special assessment.5 The good news from here is that earnings for the sector turn positive and pick up over the next couple of quarters.6

The bar is set low across the board for earnings. Typically, earnings estimates are revised lower by roughly 3-4% on average in the three months leading up to the reporting season.7 This time, however, the revisions were more pronounced at a 6.8% downward revision, marking this one of the largest declines since the pandemic.8 And these revisions were accompanied by more negative pre-announcements from companies. With this reset in place, it should become easier for more companies to beat expectations.

In the weeks ahead, we will be getting reports from the Communication Services, Consumer Discretionary, and Technology sectors, which collectively make up around 35% of the S&P 500 earnings.10 While Financials are experiencing a -19.4% year-over-year (YoY) decline in fourth quarter earnings per share (EPS), Communication Services is projected to deliver a substantial +41% YoY increase, Consumer Discretionary +23% YoY, and Information Technology +16% YoY, all of which outpace the -1.7% EPS growth expected for the broader S&P 500 (Exhibit 2).11 These upcoming reports, particularly from Big Tech in the last week of January, are critical.12 Given the strength of the economy, management teams mentioning green shoots with regards to the macro backdrop, the momentum in Artificial Intelligence (AI), and renewed optimism regarding a more positive demand picture for semiconductor chips – TSMC is now expecting +20% revenue growth in 2024 – these companies are poised to deliver positive outcomes.13

Exhibit 2: Comm. Services, Consumer Discretionary, and Tech sectors will provide strong EPS growth

Finally, as we look further out, we now have visibility into the S&P 500 2025 EPS estimate, currently standing at $275 and reflecting +12% earnings growth from 2024 levels.14 Assuming forward price-to-earnings multiples can hold around 19-20x, this implies a fair value on the S&P 500 of around 5400 as the year progresses (more on that here).15 This positive outlook underscores the potential for sustained growth and value in the broader market.

Exhibit 3: Looking out to 2025, S&P 500 EPS estimate stands at $275, +12% growth from 2024 levels

2024 Presidential Election – No Cause for Concern Just Yet

Despite being less than ten months away from the 2024 U.S. presidential election, the market does not seem squarely focused on it. As it currently stands, voter intention appears to be favoring a Trump vs. Biden redux, with former President Trump leading President Biden nationally by almost two percentage points.16 While still too early to call, the results from the recent Iowa caucus showed former President Trump’s nomination odds rising.17 Markets will be closely watching the New Hampshire primary on January 23, along with Super Tuesday on March 5 (which is when roughly one-third of all delegates are awarded) for further signs of both parties’ nominees and the impact it may have on markets.

However, history suggests that markets typically do not pay too much attention to presidential election cycles until closer to the general election, scheduled for November 5. In the last eight election cycles, the S&P 500 delivered a median return of +7.5% and +4.2% in the 12-months and 9-months leading up to election day, respectively, with positive outcomes 87% and 75% of the time, respectively (Exhibit 4).18 However, as the election draws closer, results have been more muted. Median returns for the S&P 500 were just +0.5% and +0.8% in the 3-months and 1-month leading up to the election, with positive returns 50% of the time for both periods.19 Therefore, we believe it is too early to worry about the outcome of the election.

Exhibit 4: Equity returns are positive but become more muted as we get closer to the election

However, investors should start monitoring performance divergences in areas most likely to be affected by key policy changes – taxes, tariffs, and tech – especially as we get a clearer signal regarding the Republican nominee and the potential contender to face the presumed Democratic nominee, President Biden. Currently the polls show former President Trump leading in the Republican polls and we will likely have a better indication after Super Tuesday on March 5.20 If, in fact, former President Trump becomes the Republican nominee, the market may start to price in potential upside to companies that benefit from tax cut extensions (which otherwise expire in 2025), or to domestically-focused companies with little foreign revenue exposure.21 And for Tech, markets may price-in potential downside risk depending on growing anti-trust concerns or worries about more aggressive export controls and tariffs policies (former President Trump has touted the possibility of a blanket 10% tariff on all imports).22

Wait And See Mode for Now

We will be watching for these divergencies and crosscurrent closely, though they aren’t apparent yet. In the meantime, the path of the markets is likely to be determined by the direction of Fed policy. Our view is that while the Fed will push back on the idea of March rates cuts when they meet on January 30-31, they are now biased to ease in 2024 – as long as inflation moves in the continued right and downward direction.23 The labor market has been and continues to be rebalancing all while the economy is holding up. And if that does not prevent inflation from falling further, then we see scope for the Fed to cut rates. As detailed here, this is a positive for markets, and we present our top investment ideas here.

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1. Bloomberg, iCapital Investment Strategy, as of January 19, 2024.
2. Bloomberg, iCapital Investment Strategy, as of January 19, 2024.
3. Bloomberg, iCapital Investment Strategy, as of January 19, 2024.
4. FactSet, iCapital Investment Strategy, as of January 19, 2024.
5. U.S. banks are subject to a special assessment to the Deposit Insurance Fund to cover losses from uninsured deposits.
6. FactSet, iCapital Investment Strategy, as of January 19, 2024.
7. FactSet, iCapital Investment Strategy, as of January 19, 2024.
8. FactSet, iCapital Investment Strategy, as of January 19, 2024.
9. FactSet, iCapital Investment Strategy, as of January 19, 2024.
10. Bloomberg, S&P Global, iCapital Investment Strategy, as of January 19, 2024.
11. FactSet, iCapital Investment Strategy, as of January 19, 2024.
12. Note: We refer to “Big Tech” to loosely include the largest and most influential technology companies in the industry.
13. Bloomberg, iCapital Investment Strategy, as of January 19, 2024.
14. FactSet, iCapital Investment Strategy, as of January 19, 2024.
15. Bloomberg, iCapital Investment Strategy, as of January 19, 2024.
16. Financial Times, FiveThirtyEight, iCapital Investment Strategy, as of January 19, 2024.
17. Financial Times, FiveThirtyEight, iCapital Investment Strategy, as of January 19, 2024.
18. Bloomberg, iCapital Investment Strategy, as of January 19, 2024. Note: analysis done on the last eight presidential elections since 1992.
19. Bloomberg, iCapital Investment Strategy, as of January 19, 2024. Note: analysis done on the last eight presidential elections since 1992.
20. FiveThirtyEight, iCapital Investment Strategy, as of January 19, 2024.
21. Bloomberg, iCapital Investment Strategy, as of January 19, 2024.
22. Bloomberg, JPMorgan, iCapital Investment Strategy, as of January 19, 2024.
23. Bloomberg, iCapital Investment Strategy, as of January 19, 2024.


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Anastasia Amoroso

Anastasia Amoroso

Anastasia Amoroso is a Managing Director and the Chief Investment Strategist at iCapital. In this role, she is responsible for providing insight on private and public market investing opportunities for advisors and their high-net-worth clients. Previously, Anastasia was an Executive Director and the Head of Cross-Asset Thematic Strategy for J.P. Morgan Private Bank, where she identified and invested in emerging technologies and disruptive trends such as artificial intelligence, decarbonization, and gene therapy. She also developed global tactical ideas and implemented institutional-level implementation across asset classes for clients. Anastasia regularly appears on CNBC and Bloomberg TV and is often quoted in the financial press. See Full Bio.

Nicholas Weaver

Nicholas Weaver

Nicholas is an Associate and Investment Strategist at iCapital, responsible for providing insights into investment opportunities across public and private markets. He works alongside Anastasia Amoroso, Chief Investment Strategist at iCapital. Prior to joining iCapital in 2021, Nicholas spent time as an analyst at a buy-side investment firm, where he contributed to equity and private market research. Nicholas holds a Bachelor of Science degree with a double major in Finance and Business Analytics & Information Technology (BAIT) from Rutgers University.