As markets hit the home stretch, what can investors expect?

It’s been a strong year so far, with most sharemarkets performing well despite some volatility along the way.

The S&P 500 index in the US is up 14.1 per cent, ahead of its long-term average of about ten per cent.

The UK and Europe are also up solidly so far, returning about six per cent each.

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As was the case last year, emerging market and Japanese equities have been out in front with returns in excess of 20 per cent.

With the NZ dollar lower than where it started the year, investor returns from global shares are higher still after accounting for currency movements.

It’s been more subdued closer to home, with the Australian ASX 200 flat and the NZX 50 in New Zealand rising just 1.5 per cent.

Conservative assets have had a tougher time, as healthy levels of income have been offset by price declines as interest rates have increased.

The domestic NZX corporate bond index is up 1.1 per cent, while US Treasury bonds have slipped 2.4 per cent.

Property has struggled too, with the REINZ national house price index falling 1.5 per cent and the listed property sector falling a much more substantial 9.8 per cent.

That puts the housing market on track for its fourth negative year of the last five.

The Middle East will remain a major focal point in these final two-and-a-half months of the year, although markets have coped relatively well with oil prices at higher levels.

In part, that’s because economic activity has remained resilient and earnings growth has been impressive.

We’ll get a fresh read on the latter over the next few weeks, with the global reporting season about to ramp up.

Markets are expecting year-over-year earnings growth for the S&P 500 of almost 30 per cent, which would be the third consecutive quarter of growth above 25 per cent for the index.

Because of this strength, the 12-month forward price/earnings ratio for the S&P 500 is still a very reasonable 19.1.

That means the index is bang in line with its 10-year average valuation, despite the stunning gains investors have enjoyed in recent years.

An obvious downside of this buoyant backdrop is that there’s little to dissuade central banks from tightening monetary policy further in the face of stubborn inflation.

There are two Federal Reserve meetings left this year, and markets expect another rate hike at one of those.

It’s a similar story for the Reserve Bank of New Zealand, which next meets in late October then again in December.

Markets expect the OCR to finish 2026 at either 3.00 or 3.25 per cent, up from 2.75 per cent today and 2.25 per cent at the beginning of this year.

It’s not just short-term central bank rates that are headed higher.

The US 10-year Treasury yield has climbed as high as 5.4 per cent in recent days, its highest level since 2002.

Meanwhile, the gap between French and German government bond yields has widened to its highest level since the European debt crisis days of 2011.

Sharemarkets have taken these developments remarkably well, although persistently higher borrowing costs could eventually weigh on economic growth and corporate earnings.

Politics will also be a feature of this quarter, with the New Zealand election just three weeks away and set to be a very tight race.

On the Tuesday ahead of our election, American voters will go to the polls for the US midterms.

While these might not go as well as hoped for President Trump and his Republicans, this bodes well for investors from a seasonal perspective.

This final quarter of the year is typically the strongest of the year for US shares, and the gains tend to be even better in a midterms year.

The S&P 500 has averaged a 3.1 per cent gain in December quarters since 1930, comfortably above the 1.7 per cent average for the other three.

The index has been up 75 per cent of the time in the final three months of the calendar year, on average, a much better hit rate than 60 per cent for the rest.

There have been 24 midterm years over that period, and they’ve often been even more rewarding.

The S&P 500 saw positive returns in 20 of those December quarters (making for an 83 per cent hit rate) with a very healthy average return across all 24 examples of 5.6 per cent.

Then again, the only other midterms we’ve experienced with Trump as president were in 2018, and the S&P 500 fell 14.0 per cent in the last three months of that year.

Back then, markets were grappling with a Fed tightening cycle against the backdrop of trade tensions between the US and China, as well as concerns over slowing global growth and weakness in some high-flying tech stocks.

Those conditions sound eerily similar to the backdrop of today, although we’re not seeing anywhere near the same caution from investors.

A little more than nine months of the calendar year are behind us, and investors have again been well rewarded for ignoring the noise, focusing on fundamentals and staying the course.

If the global economy remains resilient and corporate earnings continue to grow as much as expected, there’s every chance markets will finish another year in good spirits.

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