I hope you are all well and enjoying the start of fall. The summer heat in Asheville finally broke a week or so ago, and since then we’ve enjoyed pleasant days and cool nights.
For the last six months, the market has not done much. From early May through the end of July, the S&P 500 traded in a range between 7,200 and 7,600. It took a leg higher in early August and has spent the time since between about 7,600 and 7,800. Those are fairly tight ranges, especially given how much news the market has had to absorb, and it’s worth asking why.
My read is that two forces are pulling in opposite directions and largely canceling each other out. On the positive side, earnings have been excellent. As I mentioned in August, second-quarter earnings growth was very strong, and FactSet shows analysts now projecting third-quarter earnings growth of roughly 29%. On the other side, the conflict with Iran has kept oil prices near $100 a barrel. That, coupled with other concerns, has pushed Treasury yields to multi-year highs. On September 16th the Fed raised rates by a quarter point, its first increase since 2023, and suggested another hike later this year if inflation persists.
Higher rates and pricier oil make investors less willing to pay up for each dollar of earnings, and you can see it in the numbers. According to FactSet, the forward price-to-earnings ratio (what investors are paying today for each dollar of profit expected over the next twelve months) was about 21 in early May, and it’s now closer to 19. Earnings have been rising while the price investors will pay for those earnings has been falling, so the index has been treading water. I don’t read that as weakness. It’s the market doing arithmetic. Add rising election uncertainty and a historically weaker stretch of the calendar, and a range-bound market makes sense.
That brings us to the election on November 3. The nonpartisan Cook Political Report now favors Democrats to win the House, and it calls the Senate a true toss-up. Since 1906, the president’s party has lost House seats in every midterm election except three, according to RBC Wealth Management. So divided government after the midterms is a reasonable base case, and it’s quite possible the market stays in this range until we have an answer.
What comes after is more encouraging. Capital Group’s data show that since 1950 the average one-year return following a midterm election has been 15.4% (price return, excluding dividends), and not a single one of those years was negative. Schwab’s analysis shows a 12.4% average gain in the six months after midterms, also excluding dividends, with all 13 instances since 1974 positive. The usual explanation is simple: once the uncertainty clears, money that was waiting on the sidelines goes back to work.
But as we all know, past performance does not guarantee future results. And the issues that are headwinds to the markets now – the war with Iran, inflation and interest rates moving higher, uncertainty around tariffs and trade policy – are likely to remain as headwinds after the election. For how long, we don’t know.
So, what do we do? The short answer is to stay the course and be patient. We own high-quality companies that pay dividends and repurchase their shares, the kind of businesses that tend to do well in many market environments. I’ll be watching third-quarter earnings, the Fed, interest rates, and oil closely over the next few weeks.
If you’d like to talk through any of these issues, please let me know and we’ll find a time to chat.
