BNP Paribas and UBS Global Wealth Management Highlight U.S. Economy’s Resilience The U.S. economy is once again in the spotlight, with The Economist calling it the envy of the world in a recent cover story. While some, like Brett Donnelly from Spectra Markets, have noted that such magazine covers often signal a contrarian view, it’s not just The Economist that is praising U.S. economic strength. BNP Paribas strategists are focusing on U.S. resilience as policymakers and market participants head to Washington D.C. for the International Monetary Fund and World Bank meetings. They pointed out that the Atlanta Fed’s Q3 GDP growth forecast is an impressive 3.4% annualized, while the eurozone is expected to grow just 0.3% quarter-on-quarter. This means U.S. growth is likely to triple that of the eurozone in the third quarter. This performance difference is reflected in the markets. The spread between one-year forward rates in the U.S. and eurozone has widened by 60 basis points over the past month, with the U.S. dollar index rising 3%, and the S&P 500 outperforming the Euro Stoxx 50. In terms of central bank strategy, the Federal Reserve faces uncertainty heading into its next meeting, relying on current data to potentially support a quarter-point rate cut in November. In contrast, the European Central Bank has been more reactive to recent data, cutting rates unexpectedly just five weeks after hinting that a cut was unlikely. UBS Global Wealth Management has also revised its outlook, raising its target for the S&P 500 from 6,200 to 6,300 for June, and introducing a year-end 2025 target of 6,600. UBS cited a more resilient labor market, stronger-than-expected economic performance, and a medium-term growth rate above the Fed’s long-term projection of 1.8%. This strength, combined with falling inflation, has reinforced UBS’s positive view on U.S. equities for the future.

The Dow Jones Industrial Average’s performance as a predictor of U.S. presidential election outcomes warrants serious consideration. There is a strong correlation between the Dow’s year-to-date return through mid-October and the chances of the incumbent party winning the presidency. This relationship is statistically significant at a 97% confidence level. Currently, the Dow’s impressive year-to-date return suggests a 72% probability that Vice President Kamala Harris, the Democratic candidate, will win the November election. Just two months ago, the Dow indicated a 64% chance of her victory, and in May, that figure was 58%. These rising probabilities are driven by the stock market’s gains, as historical data reveals a strong link between the Dow’s performance in an election year and the incumbent party’s likelihood of success. It’s worth noting that this 72% probability stands in contrast to the 43% chance assigned by electronic futures markets, as aggregated by Election Betting Odds. Which forecast should you trust? There is no clear-cut answer. Electronic futures markets are relatively new, with limited data to establish a strong track record. The Dow, however, has over a century’s worth of data, covering more than 30 presidential elections since the late 1800s. My analysis shows that the correlation between the Dow’s year-to-date performance by mid-October and the incumbent party’s chances of winning is statistically significant. The data shows a clear pattern: The logic behind using the stock market as a predictor is that it serves as a leading indicator of the economy’s future performance, and voters tend to base their decisions on their financial situation. While consumer sentiment has been weak this year despite a strong stock market, statistical analysis shows that the stock market remains a more reliable predictor of election outcomes than consumer sentiment. In summary, the Dow’s performance as an election predictor is backed by significant historical data and deserves to be taken seriously.

Yardeni Research remains unconvinced that recent stimulus measures will make China a more attractive investment than the U.S. or India, stating that “it would take much more than interest-rate cuts, easier financing, and fiscal stimulus.” Chinese stocks have been under pressure, with recent declines wiping out gains from the September rally driven by China’s stimulus announcement. “Investors appear to have lost faith that government intervention will resolve the deeper issues in China’s economy,” Yardeni Research commented in a recent briefing. “The quick rally in Chinese equities now looks short-lived.” Exchange-traded funds (ETFs) investing in Chinese stocks have struggled. The iShares MSCI China ETF (MCHI) is on track for a 5.6% drop this week, despite a sharp increase on Wednesday, following a 7.7% loss last week. Other China-focused ETFs have fared even worse, extending their October losses. For example, the Invesco China Technology ETF (CQQQ) and KraneShares CSI China Internet ETF (KWEB) both saw weekly losses of around 7.5%, while the Invesco Golden Dragon China ETF (PGJ) dropped 7%, according to FactSet data. So far this month, these ETFs have continued their downward trend, with KWEB down nearly 5%, and MCHI retreating over 2%. “Aside from the risks of investing in China, corporate earnings have been stagnant for the past 15 years and have consistently disappointed since 2022,” Yardeni noted. “It’s easier to manipulate national growth numbers with government projects, but corporate earnings tell a more truthful story.” China faces nearly $36 trillion in outstanding bank loans, which is three times the U.S. figure. Yardeni Research likened China’s current challenges to those the U.S. faced after the global financial crisis, suggesting that without a large-scale fiscal stimulus, similar to the U.S. response during the pandemic, China may struggle to reignite growth and inflation. Consumer confidence in China has collapsed, and Yardeni pointed out that higher stock prices alone won’t be enough to boost spending. With China’s housing minister set to announce more measures to support the property sector, Yardeni remains skeptical. “Trying to stimulate an over-leveraged economy with easier financing may not be the solution. It will take time for consumers and businesses to rebuild their balance sheets after a period of excessive debt,” the firm concluded.

Matt Rowe, head of portfolio management and cross-asset strategies at Nomura Capital Management, warns that “higher degrees of inflation are our reality moving forward.” Investors are increasingly anxious about inflation risks that haven’t yet been factored into the bond market, especially with the upcoming November 5 presidential election looming. As of Tuesday, prediction markets showed Republican nominee Donald Trump leading Democratic nominee Kamala Harris. Despite this, the overall inflation outlook remains uncertain, regardless of who wins. On Tuesday, inflation concerns continued, even as oil prices dropped and Treasury yields fell. The 10-year Treasury yield ended at 4.037%, reflecting a decline from recent highs. Nevertheless, bond-market volatility, as measured by the ICE BofAML MOVE Index, remains near its highest levels of the year, raising fears that inflation could surge beyond the Federal Reserve’s ability to control it. Economists predict that Trump’s policies may result in higher inflation, interest rates, and federal deficits compared to those of Harris. However, some experts believe that inflation and economic growth could be similar regardless of the election outcome. The nation’s growing debt, which now stands at $35.7 trillion, along with a $1.9 trillion budget deficit, is also a major factor contributing to long-term inflation concerns. Eric Vanraes, head of fixed income at Eric Sturdza Investments, suggests that Trump’s potential victory could increase inflationary pressure on long-term interest rates. Still, the composition of Congress will play a crucial role. If Democrats control Congress, Trump’s policies may face limitations, meaning that the balance of power in the Senate and House could have a greater impact on long-term yields than the presidential race itself. Rowe highlights that inflation could persist due to the rising costs tied to reshoring and a more insular U.S. economy. As globalization wanes and the U.S. faces a more complex economic environment, there are limits to what interest rate policy can achieve. The past 15 years of favorable trade and accommodative policies are coming to an end, and now inflation risks could disrupt the bond, currency, and stock markets. Adding to inflation worries is the debate over the “neutral” rate of interest—a theoretical level that neither stimulates nor slows the economy. If the Federal Reserve cuts rates too aggressively, it could unintentionally ignite more inflation. Both Trump and Harris have outlined fiscal policies that could further strain the national debt and increase inflationary pressures. Although inflation may ease in the short term, the outcome of the U.S. election and the makeup of Congress will play a key role in shaping long-term inflation trends and the country’s fiscal future.