Elections, Earnings, AI and the Fed: What stock-market investors should be watching now

Wall Street has an index for everything—stocks, bonds, real estate, commodities, you name it. There’s even a financial index for fear. It’s called the VIX Volatility Index, and it purports to measure how fearful investors are about the stock market.

So how scared are we these days? Not very, according to Niladri “Neel” Mukherjee, chief investment officer of TIAA Wealth Management. Writing in the July/August edition of the CIO PerspectivesOpens in a new window newsletter, Mukherjee notes that the VIX has remained at a relatively low level for most of 2024 (see chart below). “Investors have maintained faith in the Federal Reserve’s (Fed’s) ability to bring down inflation,” Mukherjee explains. “This has kept sentiment bullish, leading investors to take risk rather than avoid it.”

Mukherjee and his team have identified four catalysts which they believe have the potential to shift the narrative on stocks in coming months:

• Elections: Headlines surrounding upcoming elections will drive markets the rest of this year and shape the outlook for 2025, according to Mukherjee. In a Trump 2.0 scenario, the markets may anticipate higher trade tariffs, curbs on immigration and an extension of the Tax Cuts and Jobs Act (TCJA) provisions. (TCJA’s income tax cuts are set to expire at the end of 2025.) The potential for a faster-growing economy could cause bond yields to stick at higher levels, or even rise, and that would cause equity volatility to increase, at least initially. It would also make it harder for the Fed to cut interest rates.
  
  What happens if Vice President Kamala Harris wins the presidency? “Bond market volatility and yields could decline,” Mukherjee writes, “as the risk of an inflationary shock from a Republican sweep recedes and as Fed rate cuts come through. A gridlock scenario may be the most favorable outcome for the markets, as it would limit the implementation of any new and possibly polarizing legislation.”
• The Fed’s next move: Until recently, the Fed could afford to focus almost exclusively on taming inflation, Mukherjee writes. Now, however, there’s evidence that the once-hot labor market is cooling. The unemployment rate ticked up to 4.1% in June (from 4.0% in May), the pace of job creation slowed, and labor demand moderated. “While inflation will still be central to Fed policies,” Mukherjee writes, “the Fed can no longer ignore the slowing growth picture, which makes it likely that Fed will initiate rate cuts in short order.” The economic circumstances surrounding those cuts will matter. If it appears the Fed kept rates too high for too long, it could cause a slowing economy to morph into a weak one. But if the Fed nails the timing, Mukherjee writes, “cash is likely to come off the sidelines and into stocks.”
• Corporate profit growth: So far this year, the top ten companies in the S&P 500—most of them technology stocks or technology-related—have been responsible for 23% of the index’s earnings. “For the overall stock market to move higher,” Mukherjee writes, “not only do the expensive mega cap names need to deliver on lofty expectations, but the others need to participate in the earnings improvement story.”
• Artificial intelligence: Mukherjee predicted back in September 2023 that artificial intelligence (AI) would be a key driver for the next great bull market. It was a prescient call. Right now, investors are focused on AI enablers like semiconductor companies and large-scale cloud computing providers. Mukherjee believes these companies have the scale and competitive advantages to be long-term winners. He cautions though that the best-known AI stocks are saddled with some very high expectations, as reflected by their valuations. Thus, he writes, “any disappointments on the revenue or earnings front may be punished by investors, creating headwinds for the broader market.
  
  Click hereOpens in a new window to read the full version of July/August’s CIO Perspectives. For more insights on the market and economy, and to discuss the implications for your investment portfolio and financial plan, please schedule a meeting with a TIAA advisor.