The U.S. stock market has proved to be quite resilient in the face of multiple, often simultaneous geopolitical threats and the next big event—France’s presidential election—is likely to have a short-lived impact, according to analysts.
Polls ahead of France’s first round vote on Sunday are incredibly close. With no candidates expected to win a majority, a May 7 runoff between Sunday’s top two vote getters will likely decide the outcome.
The fact that either a far-left or far-right, euroskeptic candidate could advance to take one—or both—of the top two spots has been making markets jittery over the past week, with European equities booking modest weekly losses, while the euro weakened against the dollar.
The S&P 500 SPX, -0.23% however, is on track for a weekly gain, trading only about 2 percentage points below its all-time high set in early March. The U.S. stock market so far has brushed off tensions in Syria, Afghanistan and increasing threats from the Korean Peninsula.
On Friday, the U.S. stock market is trading slightly lower, with investors not overly concerned with the outcome of the French election.
“An outright victory by [far-right populist] Marine Le Pen in France is likely to trigger a global equity selloff but the U.S. stock market will be the first to recover,” said Diane Jaffee, senior portfolio manager at TCW.
An outright victory Sunday by any candidate is seen as a very long shot. Meanwhile, there are three more likely scenarios, ranging from bullish to bearish.
Analysts agree that the worst-case scenario for stocks and other assets perceived as risky would be a runoff pitting far-right nationalist Marine Le Pen versus left-wing firebrand Jean-Luc Melenchon. Both are seen as euroskeptics, raising long-term questions about the viability of the euro and the European Union itself.
“Such an outcome will result in chaotic markets, with European bonds and equities selling off, euro plunging. U.S. bonds will benefit, though U.S. equities may initially sell off too,” said Ian Winer, director of equity trading at Wedbush Securities.
Jaffee and Winer both agreed the most positive outcome for markets would be if the runoff pitted Emmanuel Macron against François Fillon, both centrist career politicians.
But an outcome pitting Macron against either Le Pen or Melenchon may also be seen as a positive, Winer said. Polls indicate Macron would stand a better chance than Fillon of winning a second-round battle versus Le Pen or Melenchon.
Regardless of the outcome, any potential dip is likely to be short-lived, though this time, the risks are higher due to stretched valuations, according to Winer.
“Investors have learned that buying dips is a good strategy and we may see the S&P 500 recover very quickly even if there is a knee-jerk reaction initially. But the index is at a much higher level than before Brexit or U.S. elections, so, the risks are higher too,” Winer said.
Analysts say that global equity markets have been able to brush off geopolitical risks because investors do not believe the worst-case scenarios will happen or have lasting impact.