Trends Shaping the Equity Markets

Market Outlook and Volatility:

• Volatility in the second half of the year is expected to continue, though the source will shift from the interest rate and FX volatility seen in Q1 to equity market volatility.
• Central bank anchoring of short-to-medium-term rates has muted macro volatility, causing equities to absorb the majority of macroeconomic cross-currents.
• Low interest rates continue to drive valuation premiums on future cash flows, sustaining outperformance in the technology sector.

US Presidential Election Impact:

• Historical data (1928–present) suggests the stock market predicts election outcomes in 20 out of 23 elections; three-month returns averaged +5% for incumbent victories and -3% for losses.
• A potential Democratic sweep could trigger tax reform unwinding 2017 changes, creating a projected $20 per share reduction in S&P 500 corporate earnings (falling from $170 to $150).
• Clients are actively trading winners and losers based on potential tax policy shifts, with a specific focus on sectors that previously converged due to tax rates.
• The options market is pricing in higher volatility over an extended window rather than concentrated days, driven by postal voting uncertainties similar to the 2016 election.

Geographic and Currency Divergences:

• Diverging COVID-19 caseloads between the US and Europe/Asia are creating a potential for a weakening US dollar.
• Expectations for smoother EU reopenings, stimulus packages, and socialization are driving demand for European and Asian equities at the expense of the US.
• A 10% depreciation of the US dollar against the Euro could significantly impact returns for global equity investors.
• If interest rates rise at the back end post-vaccine (anticipated before end of 2021), value stocks (concentrated in Europe and India) may outperform growth stocks.

ESG and Social Factors:

• The "S" (Social) component of ESG is receiving increased focus in the US due to COVID-19's disproportionate impact on minorities and ongoing racial justice protests.
• ESG funds captured $14 billion in net inflows during June alone, marking the strongest month-to-date performance.
• Year-to-date ESG fund inflows total $63 billion globally, contrasting with $100 billion in outflows from broader equity funds.

Retail vs. Institutional Behavior:

• Retail Mania: Retail trading activity is surging, with daily average volumes across major platforms (Schwab, E-Trade, etc.) running 3–4 times higher than in 2019.
• Robinhood active accounts have increased over 300% in the last three months, fueling speculative trading in high-volatility names like Tesla.
• Tesla daily trading volume reached nearly $200 billion in options and exceeded $60 billion in shares on peak days, surpassing the daily volume of European Euro Stoxx futures ($30–50 billion).
• Speculative behavior is evidenced by the fivefold rise in TLSA (a microcap company) after retail traders confused the ticker with Tesla, and a surge in active Robinhood holders.
• Institutional Caution: Institutional gross and net exposures have rebounded from March lows but remain below 2019 levels.
• Institutions are actively de-grossing portfolios and reducing risk due to volatility across growth versus value segments, despite identifying ongoing opportunities.