The key event in the previous quarter was the first rate cut by the Federal Reserve in the US. We’ve been talking about it all year, about when it will happen, we mentioned it in our analyses several times and in earlier September it really happened, writes eToro analyst for Romania, Bogdan Maioreanu.
But by the end of the year there are another two decisions and several other major events. How will these affect investors in this last quarter of the year?
If we look at the agenda for this quarter we have a couple of corporate events like the earnings reports that started on the right foot last Friday with major US banks, and with Nvidia, the market star of the AI revolution, more or less closing the reporting season somewhere after the half of November. Before the end of the year, there will also be two Federal Reserve and two ECB decisions on the key interest rates and several major political Items like the climate conference and another OPEC meeting. But the main event that can politically influence the whole planet is the US Presidential elections on November 5th.
Investors are already taking into consideration all the potential outcomes of the US elections. According to the latest eToro Retail Investor Beat survey, 48% of global investors and 61% of the Romanian ones declared that they already adapted their investment portfolios for this event.
Coming back to the interest rate cuts that were so eagerly awaited by everybody, there is a high possibility that the Fed will make further cuts. Now the prospects of economic growth in the longer run are at 2%, with an expected peak in unemployment at 4.4%, and with the Fed seeing inflation gradually coming down to 2%, so there’s no need anymore for above average interest rates.
It is thus likely that the Fed will cut the key rate to something like 3.25 – 3.5% by the end of 2025 – at least these are the market expectations. Also in Europe, the ECB is still on the path for more cuts this year with experts expecting another 0.25% cut this Thursday.
In Romania there is only one last interest decision meeting left this year, on November 8th, when the National Bank of Romania will also publish a new inflation projection. With inflation expected to end the year at around 4.5%. and with a heavy election season ahead, the key interest rate is very possible to end the year unchanged at 6.50% as the NBR will want to leave itself enough maneuvre space for the uncertainties of 2025.
A lot of investors see the global economy weakening but there’s still double digit earnings growth ahead on both sides of the Atlantic. Analysts expect around 15% earnings growth in Q4 for the S&P 500 and also something like 12% earnings growth for the Europe Stoxx 600. And this might be a catalyst to push markets further.
Another element that might continue in this last quarter of the year is stocks rotation, despite the fact that this year US small-cap stocks have really underperformed compared to their larger counterparts. With market capitalizations ranging from roughly $250 million to $2 billion small caps companies, while smaller in size, can offer a significant growth potential. If we take a look at Russell 2000, their main Index, it has risen about 10% year to date. That is less compared to the S&P 500 which is up about 22% year to date, however in the past three months the performance gap has narrowed significantly because the Russell 2000 is up about 9% compared to the S&P 500 which only gained around 3%.
All in all a busy last quarter of the year, and one that traditionally is the strongest of the year, but with a lot of unknowns in geopolitics and economies that may bring short term volatility in the markets.
