In recent weeks, the S&P 500 has diverged sharply from Donald Trump’s election odds, a departure from historical trends where stock performance often mirrored political sentiment. This schism can be attributed to a confluence of factors, with market fundamentals taking precedence over election uncertainties.
The S&P 500’s remarkable performance, up 20.8% year-to-date by September 2024, defies expectations set by election-year volatility forecasts. Unlike previous cycles, where market sentiment closely tracked Trump’s election prospects, the index’s recent trajectory reflects broader economic trends rather than political forecasts.
In fact, big tech stocks, driven by the AI boom, have been the primary drivers of the S&P’s rally, led by Nvidia’s 140% gain this year. These gains emphasize the market’s decoupling from election results.
Furthermore, investor apprehension about an overly stretched price-to-earnings ratio, currently 30% above its 25-year average, suggests that the S&P’s current bullish trend may be more influenced by factors like corporate earnings and interest rate policy.
While Trump’s odds have fluctuated, the market remains insulated from political uncertainty, focusing instead on the Federal Reserve’s rate cuts and monetary easing, both of which have bolstered capital-intensive sectors like real estate and utilities.
Historically, the S&P 500 has thrived in low-interest environments, and the current year’s success largely stems from that rather than political alignment.
While some market commentators have highlighted the possibility of election-driven headwinds, with Trump’s odds still factoring into broader market calculations, the real fear lies in policy shifts. A “clean sweep” by either Trump or Harris could trigger major market perturbations, especially if either administration pursues aggressive fiscal or regulatory agendas.
However, historical data suggests that neither political party has a substantial long-term impact on market returns, with the S&P 500 experiencing growth under both Republican and Democratic leadership.
