Can the bull market in US stocks cross the election fog? JPMorgan said that the crowding of market momentum, sector sensitivity, and macroeconomic factors will be the key factors determining the stock market performance in the last few months of 2024.

Currently, the US stock market is strong, with the S&P 500 index rising by 12.5% in three months, marking the strongest increase in the run-up to an election in nearly a century.

JPMorgan's report states that although uncertainties have eased after the election, the stock market may see upward movement. However, the complexity of market dynamics remains significant, especially the crowding in high-growth sectors and the impact of the upcoming US policy shifts.

JPMorgan conducted a detailed analysis of four key election outcomes: Red Sweep (Trump and the Republicans both win), Blue Sweep (Harris and the Democrats both win), Red Split, and Blue Split. Each scenario has different economic and market impacts, reflecting the significant policy differences between the Republicans and Democrats on issues from energy independence to corporate taxation.

Red Sweep: will be bullish for sectors like energy, banks, industrial machinery, and transportation.

JPMorgan states that a Red Sweep is seen as the most favorable outcome for the market, with expectations of introducing positive policies, tax cuts, and regulatory easing in key industries like energy, banks, industrial machinery, and transportation.

Specifically:

• Energy: Energy remains one of the most sensitive sectors to Republican outcomes, with a strong correlation of 32%. With a Red Sweep, JPMorgan expects this sector to benefit from relaxed restrictions on fossil fuel exploration, drilling, and pipeline permits. Analysts believe this could lead to a substantial increase in domestic oil production, which may support employment growth in the industry, but an oversupply could lead to price fluctuations.

• Insurance: The correlation between insurance and the results of the Republican Party is 27%, mainly due to the impact of regulatory changes on the industry. Emphasizing an agenda of reducing regulations can increase the flexibility of insurance companies, especially regional participants, thereby potentially enhancing profitability. In addition, with accelerating growth, tax cuts and incentives for small businesses may increase the demand for commercial insurance, indirectly benefiting the insurance sector.

• Capital Goods: This group includes industrial equipment and machinery manufacturers, showing a sensitivity of 22% to Republican-led policies. Jpmorgan believes that capital goods companies are in a favorable position to benefit from increased infrastructure spending, focus on American manufacturing, and favorable trade policies that protect American industry. The industry also benefits from tax incentives for encouraging capital investment, which may accelerate growth within a relaxed regulatory framework.

• Durable Consumer Goods and Apparel: With a sensitivity of 19% to the Republican Party, durable consumer goods and apparel may see the removal of import tariffs and a shift in trade policies protecting American manufacturing. This industry encompasses all sectors from autos to housewares, which are typically impacted by global supply chain dependencies. A Republican-led government may impose tariffs to reduce foreign competition, benefiting domestic manufacturers. However, Jpmorgan warns that input costs may rise due to tariffs on raw materials such as steel and aluminum.

For the Federal Reserve, a red sweep could lead to a delicate balance between economic resilience and inflation pressures, possibly causing the US bond yield curve to steepen further. Jpmorgan's rate team forecasts that with expected fiscal expansion driving it, the 10-year US bond yield could rise by 30-40 basis points.

On the other hand, Jpmorgan believes that industries with significant risk exposure in global trade, such as technology and telecommunications, would suffer losses in a red sweep scenario.

It is worth noting that Jpmorgan warns that momentum trades, especially in large-cap technology and semiconductor stocks, are currently very crowded, having touched the 99th percentile three times in the past year.

This extreme crowding represents the market's vulnerability, where any sudden policy or macroeconomic shift could trigger violent rotation of stocks in this sector. The report states that a red sweep could lead investors to shift from overvalued growth stocks to value stocks and domestic equities. If the Federal Reserve continues its accommodative monetary policy, this transition may be amplified.

Blue Sweep: Potentially less favorable for the stock market.

JPMorgan believes that a blue sweep may not be favorable for the stock market, as Democrats are expected to prioritize fiscal measures targeting green energy, medical care reform, and potentially increasing corporate taxes.

This may sustain momentum in industries related to green initiatives and American manufacturing, while putting additional pressure on multinational companies reliant on global supply chains and tax incentives.

Specifically:

• Software: Under the 'blue sweep,' the software industry may benefit from policies favorable to digital infrastructure, cybersecurity, and technological innovation. The Democrats focus on expanding broadband access, supporting government-funded digital transformation, and encouraging cybersecurity initiatives, which could boost demand across industries for software services and platforms. This sector includes companies involved in cloud computing, enterprise software, and security software, all of which are poised to benefit from federal support for cutting-edge technology agendas.

• Semiconductors: Semiconductor companies are a key component of the U.S. technology industry and are expected to benefit from continued support for the 'Chip Act' and efforts to strengthen domestic chip production.

• IRA Green/Electric Vehicles/Climate: Under a Democratic-led government, green energy stocks (including those related to electric vehicles and renewable energy) will receive significant support, aligning with ambitious climate goals. Expanding tax credits, direct subsidies, and regulatory support for clean energy projects could boost companies in the solar, wind, battery storage, and electric vehicle supply chain.

• Beneficiaries of Medical Reform: With Democrats prioritizing medical reform, including measures to expand subsidies under the Affordable Care Act and reduce prescription drug prices, healthcare services and managed care providers may benefit.

• Child Tax Credit Beneficiaries: Companies in consumer, retail, and education-related industries may see increased demand linked to expanding child tax credits and social welfare programs, enhancing household spending capacity, especially in middle- and low-income families.

Analysts believe that the blue sweep will promote the continuous strengthening of the US dollar, tighten liquidity, and squeeze companies that rely on exports.

Divided government (red or blue):

While the scenario of a divided government may continue the current policy trajectory, JPMorgan points out that the outcome of a red division will provide some upside potential, especially for industries sensitive to tax cuts and regulatory relaxations.

In contrast, a blue divided government can support industries consistent with environmental and healthcare reforms, such as clean energy and pharmaceuticals.

This chart shows the performance of the S&P 500 index during the US presidents' terms. From the chart, it can be seen that regardless of whether it is the Democratic Party or Republican Party in power, the S&P 500 index has shown a long-term upward trend.

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