As the fight for the White House heats up, Harris appears to be neck and neck with Trump, despite her last-minute wild card entry. While election outcomes are crucial in shaping tax and monetary policies, do they have any impact on the stock market? Historian Allan Lichtman, dubbed the "Nostradamus" of U.S. presidential elections, predicts that Harris will win, despite the fact that the party has lost the incumbency advantage as a result of President Joe Biden's decision to withdraw from the race. Here are three stocks to buy ahead of the election.
The 2024 presidential race has taken an unexpected turn with Harris's entry, reshaping the political landscape and potentially influencing market sentiment. Investors are closely watching how this development might affect various sectors, from healthcare to technology. While some analysts caution against making investment decisions based solely on election predictions, others argue that certain industries could see significant shifts depending on the outcome. As always, a diversified portfolio remains crucial in navigating the uncertainties surrounding election cycles.
Historically, the S&P 500, which serves as a measure for the broader market's performance, has tended to surge during election years, frequently giving the highest 12-month returns in the year after midterm elections. According to a study conducted by investment advisory firm Fidelity, since 1950, the S&P 500 has returned an average of 9.1% in election years, compared to 8.3% in year-one post-elections, 4.2% in year-two post-elections (or pre-midterm elections), and 14.7% in year three (or post-midterm elections). The S&P 500 index is up 13.4% year-to-date.
According to U.S. Bank research, the average annual return of the S&P 500 in the 12 months preceding a midterm election is 0.3%, which is significantly lower than the historical average of 8.1%. However, the S&P 500 has historically outperformed in the 12-month period following a midterm election, with an average return of 16.3%. This is attributed to a prevalent theory that markets are typically averse to uncertainty, and midterm elections determine control of Congress and resolve tax and fiscal policy uncertainties, thereby contributing to the outperformance. However, the state of the economy is still the major influencer vs. any election outcome, as evidenced by the negative S&P 500 returns during the 12 months following the 1939 midterm election, a period marked by the Great Depression and The recent enthusiasm around the "great rotation" into small-cap stocks, fueled by the widely anticipated Fed rate cuts in September, may likely gain further momentum from the upcoming elections, if recent election seasons were any guide.
Small-cap companies, which typically rely heavily on floating-rate debt for operations, are particularly sensitive to interest rate fluctuations. Back in November 2016, small-caps spearheaded a market rally, dubbed the "Trump Bump," benefiting from Trump's tax cuts and deregulation efforts. However, the rally was short-lived, with the small-cap sector emerging as the worst performer in 2017. Interestingly, after a Biden win in November 2020, small-caps rallied once again, this time driven by the announcement of Covid-19 vaccines, which sparked optimism for a post-pandemic economic recovery. Small-cap stocks, lacking the financial resilience of mega-caps, were hit hardest by the pandemic and the vaccine announcements kicked off newfound hope. The rally extended into 2021, making small-caps the best performers of that year until the market crash in 2022, when Russia invaded Ukraine triggering a selloff in financial markets worldwide.
The upcoming election also brings renewed focus on environmental policies and their potential impact on the stock market. Both Harris and Trump have divergent views on climate change and renewable energy, which could significantly affect companies in the green technology and fossil fuel sectors. Investors are weighing the potential for increased government support for clean energy initiatives under a Harris administration against the possibility of continued deregulation and support for traditional energy sources under Trump. This dynamic adds another layer of complexity to investment strategies in the run-up to the election.
Factors That Influence Stock Performance During Elections
In a developed economy like the United States, elections are rarely a dominant market factor, unlike in emerging nations where politically-driven economic cycles are more relevant. Instead, major drivers such as Fed interest rates, inflation, the economy, corporate earnings, China policies, and geopolitical tensions have a far greater influence on market movements than presidential elections. During Obama's eight-year presidency from 2009 to 2017, the S&P 500 returned 189%, and the U.S. economy was on the verge of collapsing. However, the president's direct impact on the stock market is less significant than that of Congress and the Federal Reserve. Since 1953, the S&P 500 has delivered positive returns in 17 of the 20 four-year presidential terms, indicating that investors are better off betting on the market than on either party's presidential candidate.
In the mid-to-long term, election outcomes have little direct impact on the stock market. A study found that if an investor had put $1,000 in the market in 1953, when Eisenhower became president, and only invested during Republican presidencies, the investment would have grown to just under $30,000 today, whereas the same strategy during Democratic presidencies would have yielded around $60,000. However, if the investor had remained in the market regardless of who occupied the Oval Office, the investment would have grown to an impressive $1.7 million.
There has been no dearth of commentary speculating on which sectors/stocks could thrive if either party's candidate secures the presidency, but a page from the past tells a somewhat different story. Trump's trade confrontations with China led to doomsday predictions for companies deeply entrenched in the Chinese market, like Apple (AAPL), but shares of Apple doubled during Trump's presidency and set new highs in the ensuing years. Similarly, Biden's aggressive anti-f Even as the steady drumbeat of news fixates on the Oval Office, the congressional races are no less pivotal. According to experts, a split Congress is better for the markets than a Democratic/Republican-controlled Congress. The S&P 500 returned an average of 6.7% annually when Democrats controlled Congress, compared to 11% when Republicans controlled Congress. The S&P 500 returned 14.5% under a split Congress. The study's data spans 1951 to 2013. However, underlying business fundamentals and economic conditions remain critical to stock success.
The role of social media and digital platforms in shaping public opinion and potentially influencing market sentiment has become increasingly significant in recent election cycles. The spread of information – and misinformation – through these channels can create rapid shifts in investor confidence and market volatility. As we approach the 2024 election, analysts are paying close attention to trending topics and viral content on major social platforms, recognizing their potential to sway both voter and investor behavior in unprecedented ways.
Policies in Focus for 2024 Elections.
Tax Cuts and Jobs Act (TCJA)
The Tax Cuts and Jobs Act (TCJA) of 2017 that reduced corporate and individual tax rates, expires at the end of 2025. This would lead to a tax hike for more than 60% of American households in 2026. However, if this Act is extended, it could add an estimated $4.6 trillion to federal deficits over the next decade, according to the Congressional Budget Office (CBO). The Biden Administration proposed in May to keep the TCJA tax breaks for those making less than $400,000, but end it for the ultra-wealthy and scale back corporate taxes (that were reduced to 21% from 35%). A Harris presidency would keep Biden's plans for individuals making less than $400,000 a year, and raise the tax for high-income individuals to 44.6% from 39% presently, and the corporate tax to 28%. Harris is also proposing a 25% tax for Americans worth at least $100 million, on a combination of their regular pay and unrealized gains on assets that have appreciated in value, including stocks and bonds. It may create a backlash, as some of these wealthiest individuals are significant donors to campaign funds, ironically. Trump, who calls his opponent "Comrade Kamala" implying she is leftist, has promised to cut corporate taxes to 15% from 21% and extend tax breaks for top earners, while raising tariffs on foreign goods to seed a new "sovereign wealth fund" expected to return "gigantic profits."
China Imports Tariffs
The China import tariff is a shared and popular issue for both parties, with one attempting to outdo the other. Regardless of their other disagreements, both presidential contenders are dedicated to reducing dependency on China through tariffs. If Trump started the tariffs during his presidency, the Biden administration expanded them in crucial areas. duties were raised on 14 categories of Chinese imports in May, including 100% duties on EVs built in China and 50% levies on semiconductors and solar cells. Harris argues the United States' strategy to China as centered on de-risking rather than decoupling. She is expected to "finish the job" that Biden pledged. Additional tariffs, on the other hand, may backfire for the United States by raising costs for American consumers at a time when inflation targets are now within reach, fueled by widespread expectations of a Fed rate drop beginning this month. For American businesses, the consequences will include supply chain interruptions and more regulatory scrutiny when doing business with China. Nvidia, for example, is already prohibited from selling high-end AI chips such as the H100 in China, and must instead sell the H20, which has significantly less computing capacity. If the US tightens the noose even further, the H20 may be barred from sale in China, costing Nvidia $12 billion in annual sales. Trump's continued determination to boost tariffs is expected to impose further expenses on consumers.
How These Top Stocks Were Chosen
Keeping in mind that election outcomes have a lower impact on stock market performance in the medium to long term, these stocks are chosen from a variety of industries after filtering out political noise. All of these stocks have outperformed the S&P 500 in both short and long durations, including year-to-date, one-year, three-year, and five-year periods. The current selloff in these equities gives an opportunity to invest in profitable, high-quality enterprises.
Three Stocks to Buy Before the US Presidential Election.
1. NVIDIA (NVDA)
Nvidia creates high-performance semiconductors known as graphics processing units (GPUs) or accelerators to power huge computers that process data and enable generative AI.
Why Is Nvidia Stock a Popular Choice?
Despite a fantastic second-quarter earnings report and an enthusiastic outlook, shares of the AI bellwether are falling as market expectations approach unreasonable levels. However, Nvidia stock has risen 2,200% in the last five years, so a pause does not appear unreasonable.
Nvidia's stock fall is not the result of a deterioration in fundamentals. In fact, Nvidia hit the ground running, beginning with a 122.4% year-over-year increase in second-quarter revenue to a record $30.04 billion.
The company also announced higher-than-expected revenue projections for the third quarter, estimating $31.85 to $33.15 billion versus the $31.71 billion consensus. This third-quarter estimate represents an 80% year-over-year rise, but it falls short of the triple-digit growth observed in the previous four quarters, including the second quarter. Non-GAAP gross margins were 75.7% in the second quarter and are expected to stay in the mid-70s range through fiscal 2025.
Nvidia reported second-quarter earnings of $0.68 per share, compared to a consensus of $0.65. Data center revenue in the second quarter increased 154% year on year and 16% sequentially, reaching a new high of $26.3 billion. Over the last four quarters, Nvidia estimates that inference accounted for more than 40% of their data center revenue.
Nvidia also denied rumors of a delay in the release of its next-generation Blackwell AI chips, which are about twice as fast as Nvidia's existing Hopper models but have significant improvements in energy efficiency. Blackwell output is projected to increase in the fourth quarter and continue into fiscal 2026. Nvidia aims to ship several billion dollars of Blackwell revenue in the fourth quarter of 2025. Hopper demand is high, and shipments are likely to climb in the second half of fiscal 2025. The Spectrum-X, which allows Ethernet-only data centers to support large-scale AI, is on track to launch a multibillion-dollar product line within a year.
Nvidia raised its forecast for sovereign AI revenue to the low double-digit billions this year, up from previous estimates of high single-digit billions. Sovereign AI refers to a country's ability to create AI with its own infrastructure, data, workforce, and commercial networks while navigating the complicated terrain of data privacy and security.
Large multinational organizations, like Mercedes-Benz, have signed multi-year contracts with Nvidia Omniverse Cloud to create industrial digital twins of factories.
The Nvidia AI Enterprise software platform appears to be gaining traction. Nvidia expects its software, SaaS, and support revenue to surpass $2 billion annually by the end of this year, with Nvidia AI Enterprise playing a significant role in growth.
Boston Dynamics, BYD Electronics, Figure, Intrinsyc, Siemens, and Teradyne Robotics all use the Nvidia Isaac robotics platform to build autonomous robot arms, humanoids, and mobile robots.
China was the painful point in the otherwise positive earnings story, despite the fact that data center revenue in China increased sequentially in the second quarter. However, as a percentage of total data center revenue, it remains below levels seen previous to the implementation of export limits. Nvidia anticipates that the Chinese market will remain highly competitive in the future. According to some estimates, Nvidia may be barred from selling its H20 chips (a watered-down version of its H100) in China, potentially costing the company $12 billion in yearly sales.
Bottom line: The current sell-off in Nvidia shares appears to be an opportunity for long-term investors willing to overlook or capitalize on short-term volatility.
2. Eli Lilly(LLY)
The pharmaceutical business is well on its way to a $1 trillion market capitalization, thanks to the success of tirzepatide, marketed as Mounjaro for type II diabetes and Zepbound for obesity. Novo Nordisk's weight reduction drugs Wegovy and Zepbound are expected to generate more than $12 billion in sales this year. This amount is predicted to hit $35 billion by 2029.
Why is LLY Stock a Top Choice?
The LLY stock is trading near its new 52-week recent highs, with a soaring value relative to the sector and its one-five-year historical averages on practically every valuation indicator, including Price/Earnings (P/E), Price/Sales (P/S), and Price/Book. For example, LLY trades at a forward P/E ratio of 55.2x, compared to the industry average of 21.3X and its own 5-year average of 39.2.
So, why choose LLY? Because LLY appears to provide growth at an acceptable relative valuation. LLY's forward price/earnings-to-growth (PEG) ratio is 1.30, when an ideal PEG ratio would be less than 1. However, LLY appears to be cheaper than the sector's 1.98 PEG ratio and its own 5-year average of 2.19. PEG is computed by dividing a stock's P/E ratio by its earnings growth rate over a given time period. Even if LLY's PEG rises to a prudent 1.60x, the stock would still be up more than 20%.
But what makes Eli Lilly a top candidate is the momentum behind its Mounjaro and Zepbound products, which generated combined sales of $4.33 billion in the second quarter, quadrupling from $979.7 million in the same period last year.
Lilly continues to discover new health advantages and uses for Zepbound. The company filed applications in the United States and the European Union to have Zepbound licensed as a treatment for obstructive sleep apnea. A judgment is due by the end of the year, and if Eli Lilly wins FDA approval, it will offer Zepbound for sleep apnea in early 2025.
Zepbound has also been investigated for an average of two years in 700 individuals with heart failure with preserved ejection fraction (HFpEF) and obesity. Lilly estimates that HFpEF, or the heart's inability to pump enough blood to meet the body's requirements, accounts for over half of all heart failure patients. The Centers for Disease Control and Prevention estimates that approximately 6.7 million adults in the United States suffer from heart failure. The phase 3 research found that Zepbound lowered the risk of worsening heart failure by 38%, improved heart failure symptoms and physical limits by 24.8%, and reduced weight by 15.7% in adults with and without type 2 diabetes (insulin resistance).
Zepbound is not covered by many insurance plans, but by uncovering new and diverse health benefits for the drug, Eli Lilly is rapidly expanding commercial formulary coverage in the United States, with 86% access as of July 1.
In another endeavor to enhance access to the treatment, Eli Lilly is lowering the price of Zepbound, offering the 2.5 mg beginning dose for $399/month and the 5 mg dose for $549/month—far below the original retail price of $1,059. While Zepbound is often marketed in auto-injector pens, the low-cost, low-dose versions will be provided in vials to facilitate patient access. The strategic strategy intends to alleviate supply constraints around auto-injector pens and, eventually, to fight compounded versions of Zepbound marketed by competitors, which the US authorizes during times of medicine scarcity.
When Eli Lilly posted second-quarter earnings this month, it increased its fiscal 2024 sales projection by $3 billion to $45.4-46.6 billion and its annual EPS forecast by $2.60 to $16.10-16.60. These are quite astounding stats.
Eli Lilly's Kisunla was approved by the FDA for Alzheimer's disease, while Jaypirca was licensed in Japan for the treatment of relapsed or refractory mantle cell lymphoma.
Bottom line: While LLY may appear expensive based on standard valuation criteria, high growth potential for Zepbound in a variety of indications, combined with Eli Lilly's robust pipeline, may open the door to more gains.
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3. Abercrombie and Fitch (ANF)
Abercrombie & Fitch, the best comeback story in retail turnaround, has seen it all, plummeting from an iconic brand of the 1990s and 2000s to a retail pariah in 2016 due to its refusal to cater to anyone outside the "cool and good-looking" demographic, with the stock hitting a 17-year low of under $10 in 2017. Former CEO Mike Jeffries made unforgettable memories with controversial remarks that bordered on body shaming, such as "A lot of people don't belong in our clothes, and they can't belong. Are we exclusionary? Absolutely." This, combined with overtly sexualized advertising and a refusal to sell XL or XXL sizes, shattered the brand's image and stock price, making the comeback nothing short of exceptional in retail history. After Fran Horowitz took over as CEO in 2017, the firm altered directions, embracing diversity and extending its product offerings. A&F caters to youths, young adults, and middle-aged shoppers ranging in age from 13 to over 40 with its two brands, Abercrombie and Hollister. In the most recent second quarter, the Abercrombie brand accounted for 51% of total sales, followed by Hollister at 49%. A&F's Curve Love jeans, which debuted in 2019, currently offer sizes up to XXXL for curvier ladies and are quite popular. A&F's expansion into growth sectors such as athleisure and wedding attire has proven to be a profitable strategy. The ANF stock has risen by more than 138% in the last year.
Why Is ANF Stock a Top Pick?
Given ANF's solid beat-and-raise quarter, the current post-earnings selloff seemed unnecessary. When a company decreases without a significant unfavorable shift in underlying fundamentals, it appears to be profit-taking, particularly following the stock's outsized increase over the previous year. The valuation has improved, and Fran Horowitz, who oversaw the brand's rehabilitation, remains at the leadership. Furthermore, ANF has many advantages.
What are the catalysts for Abercrombie & Fitch stock?
Attractive Valuation: Abercrombie & Fitch's shares have fallen about 32% from their June 12 closing high of $192.34, resulting in a forward price-to-earnings (P/E) ratio of 12.7x, compared to its historical five-year average of 32.9x. A halfway attempt to reduce this valuation gap can result in massive rewards.
Abercrombie & Fitch, with its namesake brand Abercrombie and Hollister, caters to a broader customer base ranging from 13 to 40 and older. This translates into robust top-line growth, with the store reporting record sales of $1.1 billion in the second quarter, up 21% year on year and 18% higher in comparable sales. Comps increased 21% for Abercrombie brands and 15% for Hollister. Despite fashion's changeable loyalty patterns, these comps are stable throughout the retail universe.
For the whole year, A&F boosted its net sales growth projection to 12% to 13% from prior expectations of 10% growth from $4.3 billion in 2023, meaning revenues of at least $4.8 billion, which is extremely near to its long-term sales target of $5 billion.
Aims for the greatest operating margin in 16 years: Gross margin increased to 64.9% in the second quarter, up 240 basis points from the previous year. This resulted in an increase in operating margin of 15.5%, up 590 basis points year on year. The company also increased its full-year operating margin forecast to 14% to 15% from roughly 14% previously. The prediction not only exceeds the 11.3% operating margin in 2023, but also sets a new high for operating margins in the last 16 years.
A&F Wedding Shop Expands into Men's Clothing: The A&F Wedding Shop performed well in the second quarter. It was launched in March and aims to provide brides, bachelorettes, and guests with the perfect dress for each wedding-related event at moderate pricing ranging from $50 to $150. This is a multibillion-dollar market, and A&F has now joined the men's side by offering suiting alternatives to compliment the dresses.
Hollister's strong growth momentum: Net sales for Hollister brands increased 17% in the second quarter, up from 12% in the first. A&F is investing in incremental marketing to promote brand engagement, in addition to opening additional shop locations and experiences.
A&F's efforts to strengthen its brand and marketing presence in the United Kingdom. and Germany appear to be paying off, as the EMEA (Europe, Middle East, Africa) generated 16% sales increase on top of 4% growth in the second quarter of 2023, displaying growth on growth for the first time in over a decade (excluding a pandemic-related sales bounce in early 2022). The APAC (Asia-Pacific) region rose 3% on comparable sales growth of 21%, driven by A&F's concentration on China and Japan, as the retailer localizes its strategy and expects more runway ahead.
A&F had a solid balance sheet at the end of the quarter, with no debt and $738 million in cash and equivalents.
Bottom line: The selloff in ANF stock is exaggerated and can be linked to profit-taking following a fantastic rally in the previous year, and the stock is likely to return.
Contrary to common assumption, election results have little direct impact on the stock market compared to federal interest rates, inflation, the economy, company earnings, international trade policy, and geopolitical tensions. However, the US administration's monetary and legislative policies have a long-term impact on the economy, which affects markets. Historically, the S&P 500 has rallied during election years, with the best performance coming in the twelve months following midterm elections.
