The presidential elections in the US are coming up at the beginning of November - a total of more than USD 2.8 billion has been spent on the campaign so far. Nationally, Harris has a narrow lead of just over one percentage point over Trump, but according to polls, the latter has a razor-thin lead in six out of seven key swing states. Depending on the outcome of the elections, significantly different emphases can be expected for fiscal policy in the USA. However, there is an appetite for spending in both political camps. By contrast, the US elections have not played a major role on the financial markets so far. Based on the Citi Earnings Revision Index, earnings expectations for the S&P 500 have been revised downwards on average. This contrasts with the Citi Economic Surprise Index, which points to stronger-than-expected US economic data. The US economy appears to be continuing to grow robustly, while growth in the eurozone is rather meagre with a consensus expectation of just 0.2% for the quarter. One possible explanation for Europe's sluggish economic development is the comparatively high savings rate - a problem that is also prevalent in China. Incentives such as the ECB's interest rate cuts are welcome solutions that could contribute to a lower savings rate, more consumption and higher investment, and the measures taken by the Chinese government at the end of September are also a first step in the right direction. However, it remains to be seen whether the structural challenges can be tackled sustainably.
The earnings season is in full swing in the equity markets, with around three quarters of the companies in of the S&P 500 beating analyst expectations so far. Nevertheless, investor expectations for the future were even higher in some cases. Microsoft, for example, was able to beat earnings estimates, but its shares still lost 6% following the publication of its results due to the outlook falling short of expectations. Meta and Apple also disappointed investors with a subdued outlook or persistently high AI investments. Investors are skeptical as to whether the massive spending on artificial intelligence will pay off - so far they have no evidence of it. Alphabet and Amazon.com, on the other hand, impressed investors. Globally, only the Nikkei 225 made it into positive territory (+3%), but with a massive tailwind from a weaker currency (the index lost -0.7% in CHF and -3.1% in USD). Statistically, the remaining two months of November and December are usually among the strongest months of the year for equities, although the remaining course of the year is likely to depend heavily on the further development of the earnings reporting season and the elections. On the one hand, earnings expectations have been adjusted downwards, which increases the likelihood of positive surprises, while on the other hand the valuation level is currently high. If companies fail to meet earnings expectations or surprise with a weaker outlook, November and December could develop rather atypically compared to what the statistics would expect.
After the interest rate level fell continuously until the end of September, market participants adjusted their bets for lower interest rates upwards following the stronger than expected economic data. At the end of September, the market was still expecting three interest rate cuts for the USD by the end of the year, but this has now fallen to just two. Although the yield curve has remained virtually unchanged during this period, yields on both 2-year and 10-year US government bonds have risen by a good 50 basis points to 4.2% and 4.3% respectively over the course of the month. In Switzerland, meanwhile, yields on 2-year and 10-year government bonds were much lower at 0.39% and 0.41% respectively, and yields at the shorter end of the yield curve even fell slightly over the course of the month. The performance of precious metal prices in October, which defied the rise in interest rates, was particularly remarkable. Gold and silver rose by 4.1% and 4.8% respectively, palladium by as much as 11.6%. The US dollar index rose by 3%. The focus was also on UK gilts, which lost significant ground again following the announcement of the new budget. A comparison with the mini-budget of September 2022, when the bond market revolted, would be exaggerated this time, although the yield differential between UK gilts and German bunds reached the level of 2022. Inflation in England is currently at least on the right trend, meaning that the Bank of England has more room for maneuver.
The recently published economic data do not suggest that a recession is imminent. In the medium term, the cooling tendencies on the US labor market and the reduction in banks' loan books, which has been accompanied by higher borrowing costs for consumers, make us cautious and we are monitoring developments. Growth in Europe is likely to remain rather poor in the near future. Although further interest rate cuts provide the right incentives, changes in interest rates typically only have an impact on the economy with a delay of 12 to 18 months. In view of the high level of government debt worldwide, we currently prefer equities and real assets to bonds and sometimes diversify portfolios with an allocation to precious metals. We are still well prepared for any negative surprises with hedges and our focus on quality companies always pays off in the long term.