Equities fundamentals remain solid amidst election-related uncertainty

Our Views

Tom Lee, CFA
Tom Lee, CFA
AC
Head of Research
  • As our clients know, we have probably been too overly “wary” in front of the election and we viewed October as an “iffy” month. The S&P 500 declined ~1% in October, but YTD gains are still an impressive +20%, with equities having risen eight of 10 months – a very strong year by any standard.
  • Still, equities have waffled in the past few weeks. Several non-fundamental headwinds emerged recently, which we believe, are contributing. The first of these is the increasing expectation that the outcome of the 2024 President election will resolve itself on November 5. In addition, market internals have deteriorated recently, as my colleague Mark Newton has pointed out, while we are currently in a Federal Reserve “blackout” period with the FOMC rate decision next week (November 7).
  • To us, recent dips in equities are not reflective of fundamentals. Nevertheless, we don’t get the sense that we are in the full “risk-on” environment yet – this is likely getting pushed out into later in November. 
Read the Latest First Word
Mark L. Newton, CMT
Mark L. Newton, CMT
AC
Head of Technical Strategy
  • Equity trends remain bullish but fragile as we move into November.  Stocks, Treasury yields, and the US Dollar look to all be close to beginning a corrective pullback, which likely starts in early November but should arguably prove short-lived and not the start of a larger decline.
  • Minor pullback attempts this week have failed to do much damage but should ultimately result in 5-7% declines in US Equities for the month of November, in my view. 
  • While the intermediate-term bullish thesis remains very much intact, it’s doubtful that US Equities will continue to push up into the election and post-election without any consolidation.
  • Bottom line, risk/reward seems poor to me in the short run, and SPX seems unlikely to exceed 6000 right away but could find initial resistance near 5900-5935. Meanwhile, QQQ should arguably find resistance at 503-505.
Read the Latest Daily Technical Strategy
Sean Farrell
Sean Farrell
AC
Head of Crypto Strategy
  • Despite record inflows into BTC ETFs and bullish sentiment in the CME futures market, we posit that many crypto-native investors remain sidelined.
  • Trump’s stalling momentum and potential derisking ahead of the election might be causing BTC’s current retest of $70k despite strong ETF inflows and a major breakout.
  • MicroStrategy’s announcement to deploy nearly $43 billion into BTC over the next three years represents significant bullish buy pressure and could positively impact near-term prices.
  • The Stacks Nakamoto upgrade enhances its alignment with Bitcoin through faster block times and improved security. STX remains a compelling way to gain exposure to Bitcoin DeFi and access reliable BTC beta.
  • Core Strategy – As we approach year-end, we maintain an optimistic outlook for the crypto market. Favorable seasonality, election-driven tailwinds, and suitable liquidity conditions create a favorable backdrop, skewing risks to the upside. We maintain a bias toward being overweight SOL and remain generally focused on the majors, while selectively adding exposure to altcoins such as HNT, JTO, BONK, RAY, STX, BNB, and CORE. 
Read the Latest Crypto Strategy
L . Thomas Block
L . Thomas Block
Washington Policy Strategist
  • Turnout for early voting has been on the high side thus far, with polls continuing to show a very tight race in the five critical swing states. 
  • The Senate continues to tilt toward Republicans, in part due to the retirement of West Virginia’s Democratic senator Joe Manchin and the anemic polling numbers of Montana’s incumbent Democratic senator Jon Tester.
  • Control of the House will likely be follow the results of the Presidential race, and as such, also remains too close to call.
Read the Latest US Policy

Wall Street Debrief — Weekly Roundup

Key Takeaways

  • The S&P 500 fell 1.37% to 5,728.80 this week, while the Nasdaq slid 1.50% to 18,239.92. Bitcoin was up almost 2% from its Monday levels, at $69,295.63 as of late Friday afternoon.
  • After an 'iffy' October, Fundstrat Head of Research Tom Lee sees emerging short-term headwinds that could present continued challenges for equities in November.
  • Nevertheless, both Lee and Head of Technical Strategy Mark Newton maintain constructive views on equities for the intermediate term.

"Champions are champions not because they do anything extraordinary but because they do the ordinary things better than anyone else." ~ Chuck Noll

Good evening,

A month ago, Fundstrat Head of Research Tom Lee warned that October could be "iffy" for stock investors, and although he was surprised by the strong advances we saw during the month, the S&P 500 ultimately ended down about 1% for the month. That's not to say that this is the start of a major decline, however. Lee still sees stocks as having solid fundamentals. For one thing, "real revenue growth, adjusted for inflation, is surging," he told clients during a special election installment of his monthly Market Update webinar.

However, he continues to see the possibility of near-term volatility and challenging conditions for the month of November, due to some recently emerging headwinds. One of those stems from the expectation that the uncertainty surrounding the upcoming election could extend well past November 5, Election Day. A survey of our clients during the webinar showed that roughly 75% of them believe that the results will only be made clear between mid-November and the end of the year. VIX futures trading suggests that the market agrees. The VIX term structure is currently inverted and is staying inverted past election day, implying that markets expect larger volatility moves near-term. This makes sense to Lee: "Intuitively, we can imagine equity markets would be 'on hold' until after this election decision is made."

Fundstrat Head of Technical Strategy Mark Newton is also wary of what might happen to markets in November. This week, he  told us that near-term equity trends look "fragile." This assessment is based in part on recent breadth and momentum readings, which he told us at our weekly research huddle have gotten "increasingly worse in the last couple weeks."  Breadth is now "abysmal," he said, noting that "the percentage of stocks above their 10-day moving averages is now down at a very low level of 36%." That's notable because in recent history, "when we've gotten to those levels, like back in September, back in August, back in June and April, the market has shown pretty big corrections into that time."

"My thinking is that November is going to be a down month," Newton said. On an intermediate term, however, the market still looks healthy to him. "The overall level of the percentage of stocks that are within 20% of their 52 week highs is still at 84% so that's still very, very good."

Lee also remains sanguine after election uncertainty fades. "The Fed remains dovish, and in my view, Fed cuts are boosting the economy," he said. Furthermore, "inflation expectations remain in check. When  you look at market expectations, you really start to see markets come under pressure when inflation expectations rise above the 4% level – that's when stocks begin to bottom. We're not at that point," he said. This is shown in our Chart of the Week:

Both Lee and Newton have long maintained their intermediate- and long-term constructive views on equities as a whole. As Lee put it, "Whatever happens in the next couple weeks – even if the potential for weakness manifests – keep in mind that this has been an exceptionally strong year in which the S&P 500 avoided many opportunities for weakness. So even if, for example, we have a disputed election, it's not going to suddenly weaken."

Sector Allocation Strategy

These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton – part of the November 2024 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.

Elsewhere

Boeing and leaders of the International Association of Machinists reached a tentative agreement to end a seven-week strike. Per terms of the deal, union members will get a 38% raise over the course of the four-year contract, receive $12,000 ratification bonus deposited into their 401(k) plans, and receive improved 401(k) and health-car benefits. IAM members are scheduled to vote on the agreement on Monday.

Novo Nordisk's blockbusters Ozempic and Wegovy treatments are no longer on  the FDA's "currently in shortage" list. The change in status means that off-label compounded equivalents such as those offered by companies like Noom and Hims & Hers will no longer be allowed to be sold en masse, though individual prescriptions for them remain permissible.

OpenAI added search functionality to ChatGPT, bringing the company and its chatbot into more direct competition with the leader in web search, Google. The upgrade – at least for now only available to paid subscribers – means that users can get answers from ChatGPT that are based on current information, rather than on the somewhat stale data on which the chatbot was trained.

Prosecutors in Milan alleged that a private investigation firm hacked into Italian state security and law enforcement databases, selling secret information about police investigations and the private financial activity of business leaders, celebrities, and politicians at the highest levels, including former Prime Minister Matteo Renzi. The information was reportedly used for various illegal purposes, including but not limited to blackmail. Among those now associated with the scandal and Equalize, the firm allegedly behind it, include organized crime groups, the Vatican, and Israeli intelligence. 

China's BYD reported quarterly revenues rise to above those of Tesla for the first time, reaching CNY 200 billion (USD $28.2 billion). The figure represents a 24% rise YoY and incorporates a monthly sales record in September. Nevertheless, Tesla sold more electric vehicles last quarter. 

Spain reported at least 158 fatalities after an unprecedented amount of rain caused widespread flash floods in the country's southeastern region, which includes its third-largest city, Valencia. The area got more in eight hours than it had in the preceding 20 months, when a drought hardened the ground, left it less capable of absorbing precipitation, and thus exacerbated the effect of the sustained downpour.

SMCI shares plummeted by about 45% after its auditor resigned. Ernst & Young resigned just 17 months after the previous auditor, Deloitte & Touche, also stepped aside. E&Y said in a statement that it was "unwilling to be associated with the financial statement prepared by management." The Department of Justice is reportedly looking into allegations of accounting fraud at the company, which has promised an update on Tuesday, November 5.

Japan saw a shock result in a snap election that left the Liberal Democratic Party without a majority in the lower house of its Parliament. Voters abandoned the LDP, which has effectively dominated Japanese politics almost continuously since 1955, after a widening corruption scandal in which numerous party members are alleged to have taken kickbacks and under-reported proceeds from party fundraisers for years. 

Important Events

U.S. Presidential Election 2024
Tue, Nov 5 6:00 AM ET
ISM Services PMI, October
Tue, Nov 5 10:00 AM ET

Est.: 53.5 Prev.: 54.9

S&P Global Services PMI, October final
Wed, Nov 6 9:45 AM ET

Est.: 55.3 Prev.: 55.3

Non-Farm Productivity, 3Q prelim
Thu, Nov 7 8:30 AM ET

Est. 2.3% Prev.: 2.5%

Unit Labor Costs, 3Q prelim
Thu, Nov 7 8:30 AM ET

Est.: 0.8% Prev.: 0.4%

FOMC Rate Decision
Thu, Nov 7 2:00 PM ET

Est.: 4.50%- 4.75% Prev.: 4.75% – 5.00%

Stock List Performance

Strategy YTD YTD vs S&P 500 Inception vs S&P 500
Upticks
+25.65%
+5.85%
+34.79%
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