The Big Vote

HIGHLIGHTS:

• Votes are still being counted for the US midterm elections, but forecasts are signaling that Democrats likely held onto the Senate, but lost control of the House.
• Financial markets view gridlock as a benefit via fewer new policies for taxes, fiscal spending, and regulation.
• Third-quarter corporate results show earnings grew by 3.9 percent, though estimates for next quarter are in the red.
• The Consumer Price Index release for October will be announced on Thursday and is expected to show inflation’s pace declined to 7.9 percent.

This week’s big news for markets comes out of Capitol Hill as officials announce the results of the midterm elections. Forecasts currently point to Democrats holding onto the Senate, but losing the House to Republican control. Pundits had predicted a red wave—where Republican candidates would sweep many up-for-grab seats, similar to the blue wave seen in the last cycle. However, that did not materialize, with Democrats performing better than expected. So far, the financial market reaction has been muted as other factors weighed on prices, but investors are likely fairly satisfied with the outcome. From a purely financial standpoint, markets typically favor policies that are considered more Republican-leaning, but political gridlock may be similarly positive. No new taxes or fiscal spending, less regulation and focus on big tech breakups, and continued attention toward domestic production are some potential policy outcomes that would benefit stock prices. While many lawmaker seats have been called, votes are still being tallied, particularly for the closer races, and it may take days or even weeks to get the final election results.

Investors are also closely following results from the third-quarter earnings season. So far, 456 of the companies within the S&P 500 Index have reported, and the latest trends show that corporations were able to weather the recent economic issues. After reflecting a decline in the first few weeks, earnings have turned positive again and are pointing to 3.9 percent growth in the third quarter—beating estimates for 2.7 percent at the end of September. Revenue growth remained surprisingly steady at just over 12 percent. While the results are relatively upbeat, there are troubling signals as well. Only 69 percent of companies beat their expectations, notably below the 77 percent average over the last five years. Additionally, analysts have been slowly lowering their earnings forecasts for companies over the last several months, reflecting a more realistic environment. Wall Street now forecasts a 1 percent decline in earnings in the fourth quarter, revealing a 5 percent drop from estimates in September. That would bring the full-year 2022 earnings growth to about 6 percent. However, the decline may be short-lived as forecasts for the first two quarters of 2023 show low single-digit growth.

Election results seem to be fairly positive for financial markets, and investors are likely content with the most recent quarterly earnings despite some signs that there could be slower growth for corporations ahead. Much of that prediction relies on interest rates and the Fed’s policy as it struggles in the ring against inflation. On Thursday, the October release of the Consumer Price Index is expected to show inflation’s pace slowing to 7.9 percent from 8.2 percent in September—a marginal decline at best. Fed officials will likely be waiting to see if that trend accelerates in the coming months, or if even more aggressive action needs to be taken.

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