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US equity valuations have risen to 21.8X consensus EPS estimates for 2025 while non-US are 13.3X. As discussed last week, we are quite comfortable with our overweights in small- and mid-cap US growth stocks, but believe large caps are more fully valued for positive outcomes in the economy.
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With remarkably close opinion polls, much of the world was shocked to see how quickly the US election outcome was resolved and how strongly the results favored Republicans.
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Dispersion between winners and losers is usually very wide in dynamic, innovative industries. We suspect that the intense focus on big tech may have driven too wide a performance divergence.
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With a consequential US election two weeks ahead, we are updating global economic forecasts with all the information that we have today. As US policy becomes clearer in the months to come, important variables could change.
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We’ve noted many times that today’s US presidential candidates of both parties have presided over historically large share price increases. The annualized return for the S&P 500 over the course of the Trump/Pence administration was 16.4% while Biden/Harris has averaged 13.1% to date. This can be credited significantly to the 10.9% annualized rise in S&P 500 earnings per share over the last eight years, not the person sitting in the White House.
Yet US Presidents do wield much power, and can change market expectations, particularly over the short term. The foreign policy and mix of domestic polices of Harris or Trump (presented in alphabetical order) are more than enough to sway the expectations of global markets.
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Trump’s victory, with a likely Republican sweep of the Senate and House, has led to aggressive pricing of higher inflation expectations, fewer rate cuts, stronger USD, higher US and Japanese equities and weaker emerging market (EM) equities.There may be further upside in yields and USD in the coming months, but the scale and timing are uncertain. Even with control of Congress, tax cuts and even tariffs may take time to be implemented, with uncertain impact since both are highly anticipated.
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Markets are moving swiftly to price in a different policy outlook for taxes, regulation and trade. We believe the US bond market’s movement is not over. Confirmation of Republican control of the House – and consequent tax plans - would likely mean a repricing of the Fed with a terminal rate closer to 4.0% than the current 3.5%. (Treasury Inflation Protected Securities saw a jump in the expected 10yr inflation rate this morning from 2.3% to 2.4%.)
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Stock market volatility in election years has tended to decline into the summer months and then pick up as the election draws near. Leadership has often been defensive in the six months before elections and cyclical in the six months after them.
There are two main ways the election may impact municipal bonds. The first involves taxes and the second involves federal funding for states and localities.
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It’s been a wild ride on the US political front ever since the June 27 Presidential debate. More recently, between July 13 and July 21, an attempt was made on former President Trump’s life, the GOP nominee tapped Ohio Senator, JD Vance, as his running mate, and President Biden dropped out of the race, tossing his weight behind Vice President Kamala Harris.
Historically, the odds have been good for sitting Presidents seeking re-election in the absence of a recession. By contrast, when the incumbent party ran someone other than the sitting President, they lost in 1952, 1960, 1968, 2000, 2008 and 2016. Bush won in 1988. Will there be a push to have Biden’s successor at the top of the Democratic party’s ticket run as a sitting President?
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IPB Clients: AUM US$200,000 to < US$1 Million
Singapore Clients: AUM S$1.5 Million and above
IPB Clients: AUM US$1 Million and above
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