Investing.com -- Despite typical volatility around elections, election results have not historically brought an end to bull markets on their own, according to Evercore ISI.
“The Election, despite what pundits say, will not itself end the Bull market. 100 years of stock market history from DJIA 200 to 42,000, through Presidents and Parties, say as much,” Evercore strategists led by Julian Emanuel said in a note.
They note that key indicators that do signal the end of bull markets are fundamentally economic rather than political, pointing out three key conditions that investors should monitor: the onset of recessions, “irrational exuberance” in valuations and market behavior, and uncooperative Federal Reserve policy.
At the moment, Evercore sees no signs of a looming recession. Weekly jobless claims remain below 300,000, indicating continued economic growth. Credit spreads for both high-yield and investment-grade bonds are near post-pandemic lows, suggesting robust economic stability.
In addition, Evercore’s internal company surveys, while in “struggling” territory at 47.6, are above the 45 threshold that historically aligns with recessions.
Valuations, though elevated at 24x trailing twelve-month (TTM) earnings, have not reached the ‘irrational’ 28x TTM level that historically draws concern, according to the note.
Strategists explain that expensive markets can sustain gains for up to 18 months, provided there are no significant speculative surges in IPOs or M&A activity. Such frenzied activity is currently absent, and investor sentiment does not reflect extremes.
“It is the behavior that creates such an extreme valuation that is the catalyst – a surge in IPOs and M&A, typical of market peaks, and nowhere near a concern presently,” strategists said.
As for Fed policy, Evercore emphasizes that while “uncooperative” policy could shift market dynamics, the central bank currently remains in a rate-cutting mode.
This setup “is harder to define, but we’ll know it when we see it, and is likely to be driven by inflation proving stickier than perceived,” strategists noted.
Overall, the bull market “looks to remain intact,” Evercore’s team emphasizes. However, it adds that the S&P 500 index has the potential for a post-election “meltup” to 6,500 or experience a sell-off.
The investment bank advises investors to maintain an overweight position in sectors such as Technology and Communication Services, particularly in software and biotech, complemented by small-cap equities. Defensive plays in Consumer Staples and Health Care are also recommended.