Multiple key factors are difficult to predict, will the US stock market experience severe volatility?

Stock investors will face a series of unpredictable outcomes and confusing market signals. Given the current situation, the best choice for investors may be to wait for the situation to clarify before making investments.

The US election situation is tense, European corporate earnings season has improved after a slow start, interest rates are uncomfortably rising continuously, and the market seems to be torn between hedging declines and preparing for an uptrend. The momentum of benchmark stock indices is cooling off, but has not clearly turned negative. There are also no signs indicating that the current consolidation is evolving into a deeper correction.

It is currently difficult to find clues from thematic positioning. Large tech companies have recently experienced volatility, causing the stock market to lose strong upward momentum. Lower-quality parts of the market, such as unprofitable tech stocks and heavily shorted stocks, are underperforming. Stocks benefiting from inflation, stagflation, and cyclical stocks are leading the way.

Volatility has increased recently. Although most of the S&P 500 index's record highs this year occurred when the VIX index was low, the record highs set in recent weeks have been accompanied by greater price fluctuations. Strategists at Tier 1 Alpha stated, "Periods of increased volatility in a bull market may not necessarily be a cause for concern, but a sign of a mature rebound."

This paves the way for a potential rebound - depending on the outcomes of several coin toss events. The most important of these is the US election. History suggests that in the final days before the November 5th vote, volatility should decrease. However, at present, the range of volatility in the outcomes seems broader than ever before.

Monica Defend, Chief Strategist at Amundi SA, wrote, "The most important thing is that it will only be clear after the election which policies will be implemented - apart from the election rhetoric - or whether Congress will agree to enact these policies." At the same time, the dynamics of the financial reporting season are constantly changing. The strong performance announced by Hermès and Unilever (UL.US) indicates that there will eventually be good news in the luxury goods and consumer goods sectors. From a broader perspective, analysis shows that despite facing unfavorable revenue factors, companies are still generating profits.

Investors have always been willing to reward companies with strong performance, while there is not much punishment for companies with poor performance. Christoph Mertens, portfolio manager at Fuerst Fugger Privatbank AG, said that the low threshold has created room for surprises, "some companies have been able to take advantage of this."

Merck Finck's co-head of stock business, Marc Decker, pointed out that 74% of U.S. companies have performed better than expected, while about half of European companies have exceeded expectations. The key pivot of profitability - also a difficult pivot to determine - is the data of large tech companies. He said, "Stock prices and valuation multiples can undoubtedly be considered quite high. Investors' expectations are also so. Although some are looking for alternatives outside of large tech companies, this has not yet developed to the point of completely breaking away from the tech industry."

Considering all this, the market direction is still event-driven, as traders digest one news item after another, the market may remain unstable. Hedge fund investors' positions may limit the range of losses, but the unknown impact of financial reports, the outcome of the U.S. election, and the direction of interest rates may make things chaotic at the end of the year.

In this situation, Mertens suggests staying optimistic but diversifying investments fully. He said investors should keep cash on hand for potential opportunities, as there are bound to be some big moves in the coming days