Wall Street Is Calm About Midterms, but the Bond Market May Not Be
Apple and Palantir didn’t hurt the market much, and investors are waiting on the results. None of the likely outcomes look like a disaster for stocks.
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A poor response to earnings from Apple (AAPL) and Palantir Technologies (PLTR) didn’t hurt the market much on Tuesday. To the contrary, semiconductors bounced back nicely, and some other AI infrastructure plays, like the data center names, bounced from recent lows. The Invesco QQQ Trust (QQQ) and the Roundhill Magnificent Seven ETF (MAGS) gained around 0.6%, but breadth was slightly negative at around 47%. It wasn’t a bad day, but many investors are waiting for the election results before they make their next move.
What Election Means for the Market
There has been more than enough news coverage of the election, and plenty of hysteria to go with it, but Wall Street’s views on what it means were fairly measured. JPMorgan laid out the possible outcomes using prediction market odds as of November 1. A Democratic sweep of both the House and Senate was the most likely result, at about 66%. JPMorgan expects only a modest stock market reaction to that outcome, somewhere between a small loss and a small gain. A split Congress, with Democrats taking the House and Republicans holding the Senate, had odds of about 26%, and JPMorgan sees a slightly better reaction to it. A Republican sweep, at 7%, would produce the strongest rally, but it is the least likely outcome.
Yardeni Research warns that a Democratic sweep could be “a cold shower for stocks,” but it would view a significant selloff as a buying opportunity, given the strength of the economy and corporate earnings. That reflects what I have been saying.
Yardeni also pointed out that gridlock may not work the way it traditionally has. President Trump has relied heavily on executive authority, so a Democratic Congress may do little to restrain him. And Democrats are likely to have their own internal divisions to deal with, which makes it harder for them to push through an agenda of their own.
Bond Market Risk
The bigger risk may be in the bond market. Yardeni’s concern is that deeper partisanship turns gridlock into paralysis, with fights over spending and the debt ceiling and possible government shutdowns pushing Treasury yields higher. That would be a problem for stocks at a time when investors are already worried about Washington’s finances.
I suspect the bond market will react negatively no matter who wins, because neither party is likely to do anything effective about spending, inflation or affordability.
The good news is that none of the likely outcomes looks like a disaster for stocks. Once the results are in, much of the uncertainty is gone, and the market can get back to focusing on earnings, the Fed and the rotation.
Game Plan
I’m staying patient until the results are in and the market shows how it wants to react. The rotation is still in place, and I’ll be watching for the stocks with the best relative strength to make their move once the uncertainty clears.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
