BofA Analysts Flag Market Risks from China, Fed Cuts, and Tax Loss Harvesting 
Mizuho Analysts Raise Nvidia AI GPU Shipment Forecast for 2025 
Tariffs Could Reignite Inflation, UBS Warns 
Oil Prices Surge Amid Heightened Middle East Conflict 
California Becomes Key Battleground in Fight for U.S. House Control 
Asia-Pacific Cross-Border M&A Booms as Japan Drives Growth 
Israel Escalates Conflict with Ground Raids into Lebanon 
Russia Faces Critical Yuan Shortage as U.S. Sanctions Threaten Chinese Banking Ties 
Global Markets Waver as Fed Signals Caution on Rate Cuts; Oil Ends Flat Amid Middle East Tensions 
Harris Favored to Win Presidency, But Trump Could Gain if Economy Weakens 
Tesla's Robotaxi Day Unlikely to Shift Investor Sentiment, Says Barclays 
Federal Court Partially Dismisses FTC's Antitrust Lawsuit Against Amazon 
Moody's Downgrades Israel's Credit Rating Amid Regional Conflict 
China Central Bank Directs Mortgage Rate Cuts to Revitalize Property Market 
South Korea’s Export Growth Slows in September, Supporting Rate Cut Expectations 
Wells Fargo analysts believe current market conditions offer a compelling opportunity for short-term gains in small-cap stocks, given the close U.S. presidential race and certain economic catalysts. The investment bank suggests that the "50/50" nature of the race, particularly with the potential for a Trump victory, could result in favorable returns for small caps.
"Small caps have a positive expected near-term relative return as the presidential race is essentially a coin toss (per RCP) with five weeks to go," the analysts wrote. "Expected small-cap returns are favorably skewed, with significant near-term outperformance in the event of a Trump win and limited underperformance with a Harris victory."
Potential Outperformance with Trump Win
If Trump is re-elected, Wells Fargo anticipates a 5-10% outperformance in small caps within one to three months. This prediction is based on market behavior following the 2016 election and the reaction to an assassination attempt on Trump in July 2024. In 2016, the S&P 600 Small Cap index rose 15.7% by year-end, in contrast to a 5% gain in the S&P 500. After the July 2024 incident, the S&P 600 increased by 6.4% by the end of the month, while the S&P 500 dropped by 1.6%.
Limited Downside for Harris Win
Even in a scenario where Vice President Kamala Harris wins the presidency, Wells Fargo projects only limited downside for small caps, with an estimated 2-3% underperformance. The report does, however, emphasize that Harris’s policies are less clearly defined, making it challenging to forecast their exact impact on the market.
Broader Economic Factors
Wells Fargo also highlights other macroeconomic factors, such as the Atlanta Federal Reserve’s projected 3.1% GDP growth for Q3, which exceeds consensus estimates. Historically, instances where GDP growth outperforms expectations have led to significant gains for small-cap stocks. The GDP report, scheduled for release on October 30, is seen as a potential catalyst for the small-cap segment.
Market Positioning and Strategy
Wells Fargo recommends that investors add small-cap exposure in anticipation of these positive factors.
“Time for a tactical shift to smaller caps and select cyclicals related to relative performance, expected returns around the election, and a possible GDP catalyst,” the analysts continued.
Long-Term Investment View
Despite the near-term optimism for small caps, Wells Fargo maintains a preference for mid-cap growth stocks over the long term, citing a favorable risk-reward profile.
