Biden crashes, what would Trump as new president mean for the stock market, expectations for Q2 2024 earnings season, markets still overheated.

Chart of the week

Predictit is a company that offers bets on the American elections. The chart above shows the odds on whether Biden (purple) and Trump (light blue) will win the election as US President. Predictit has a good forecasting quality, as the odds are based on real capital invested and not on polls.
After the first televised duel, the odds have changed massively. Everything now points to Trump as the next president. The ratings for Biden plummeted after his appearance. It remains to be seen whether Biden can make up the lost ground.
Biden's campaign team knew about the danger that has now materialized. For over 20 years, the debates have followed the same pattern. This was changed that year. The debates were always Biden's weakness. There are only two debates between the candidates, not three, and they take place earlier. This allows the Biden team to "fix" mistakes from the debates.

Why this is important
America is still the world's largest economy. 80% of all global transactions are conducted in USD. This is why political developments in the US have an impact on stock markets worldwide.
In this market report we only look at the effects on the stock markets:

Biden:

Stability of current economic growth. No president has ever been re-elected in the USA when the country was in recession. However, as the economy is doing well and there is currently no sign of a recession, this speaks in favor of Biden. When in doubt, rely on the tried and tested and don't experiment.

Trump:

Trump wants to cut taxes for companies by 10% and increase import tariffs by 10% across the board.
This will drive up US debt. Accordingly, interest rates have risen sharply since the TV debate.
Lower taxes could boost the economy too much and lead to more inflation.
The measures announced would be positive for equities. Especially for US companies, which generate the majority of their profits in the USA.

What also needs to be taken into account is the US Senate, in which the Democrats have a (slim) majority. Should Trump be elected president and also turn the majority in the Senate, the Republicans would have a free hand to make major changes.

Even if Trump is positive for share performance in the US, the geopolitical picture is different. Geopolitical uncertainties are likely to increase. Trump is likely to push the USA back from its role as the world's policeman and other players will move into this power vacuum. This does not bode well for the Middle East in particular. It is also to be expected that Trump will reignite the trade war with China.

Trump's inauguration as the new president is likely to be different from the first time around. During his first presidency, Trump himself was surprised by his election and poorly prepared. Accordingly, he was severely slowed down by the administration.

After the election and before taking office, a president can fill up to 4,000 positions in the administration. Trump did not have a list of candidates to hand last time. But two think tanks in the USA are already holding hearings to draw up such a list for Trump. Trump is likely to change the whole of America much more intensively in his second presidency.

There is a stock market saying: "Political stock markets have short legs". Politics does have an impact on the economy, but companies are excellent at adapting to new political circumstances.
If Trump is elected, some sectors will certainly suffer (companies in the environmental sector) while others will gain (companies in the traditional energy sector or Bitcoin).

A change in the presidency will not have a major impact on big trends such as artificial intelligence and disruption.

Expectations for the Q2 2024 earnings season

The chart shows the expected earnings for each quarter since 2021 (blue bars) and the actual reported earnings (blue dot).

What is striking is that the expected profits almost always slightly beat the forecasts. It is more comfortable for company managers to keep expectations low and surprise positively when publishing, rather than the other way around. In the last quarter, an average increase of 1% was expected for all companies in the S&P 500, but 6% was delivered. This was also a reason for the good returns on the stock markets.

An increase of 9% is expected for the second quarter of 2024. That is very high. Whether the companies will be able to exceed these estimates again is not yet certain. We think the estimates are too high.
It is also interesting to see what the companies are doing with their profits and available cash. This is usually communicated at the press conference held when the quarterly results are published.

Companies spend around 10% of their available cash on company acquisitions (grey line) and 43% is distributed as dividends or used to buy back shares via buyback programs (light blue line). The remaining 46% is invested in the future (dark blue line). On the one hand in research (R&D), on the other hand capex. Capex is a company's capital expenditure or capital costs for the purchase, maintenance or improvement of its fixed assets, such as buildings, vehicles, equipment or land. They are considered capital expenditure if the asset is newly acquired.

Markets still overheated
The market, especially in the USA, is being driven by fewer and fewer stocks:

The chart shows the percentage of stocks in the S&P 500 that outperform the overall index each year. Currently, this is only 25%, the lowest figure in 50 years! The market is on ever thinner foundations, which makes it vulnerable to corrections.
The market and the share index are driven by company earnings. These are currently exceptionally stable. An increase of 9% is even expected for the second quarter of 2024.

The chart shows how much the returns deviate from the long-term trend. Here, too, we can see that we are in an area where corrections have occurred in the past.

A cautious investment policy is therefore essential.