The trajectory of the inflation rate and the health of the US economy over the rest of this year will obviously be critical to the markets’ performance over the remainder of the year.

Solid growth, which the US has been experiencing, and relatively low inflation are correlated with above-average sharemarket returns, while a slowing economy and relatively high inflation rates tend to produce positive but modest gains.

[Trump’s proposed] universal ten per cent tariff on all imports … could lead to a new global trade war.

Markets do respond to presidential debates, there has been significant intraday volatility during recent debates, and, with the stakes in this election as significant as any this century, the perceived outcome from this one could have material effects.

Donald Trump, according to the polls, leads Biden, particularly in the handful of states which decide US elections.

A strong performance from Trump, or a weak one by Biden, would cause financial market participants to focus more intensely on Trump’s aggressive policy agenda, or rather the policy agenda developed by his ultra-conservative Republican advisers.

His universal 10 per cent tariff on all imports and a 60 per cent tariff on Chinese imports, or even, as he mused bizarrely recently, the repeal of all US income taxes and their replacement with income from tariffs, would be immensely disruptive to not just the US economy, but to the global economy. It could lead to a new global trade war, with even America’s closest allies retaliating with their own trade sanctions.

The Trump trade policies would be very inflationary, as would his proposed mass detention and deportation of immigrants, which could lead to labour shortages and higher labour costs.

His likely extension of his 2017 tax cuts and a foreshadowed second round of similar cuts for the wealthy would add to already unsustainable US government debt and deficits.

If it appears that Trump is going to win the election, his isolationist tendencies, his antipathy to global institutions (and predilection for despots) and his radical plans to remake the US bureaucracy will generate global volatility and even fear.

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Biden, whilst not as big a big spender as Trump was in his last term, is still a big spender, and would probably spend more on social welfare, climate change and incentives for the re-shoring of strategic industries. He, too, has yet to outline any plan to bring America’s spiralling deficits and debt under control.

His administration has been stable and run by experienced technocrats, which (unlike the previous, highly volatile, Trump administration) has been reassuring to America’s traditional allies.

Biden’s economic, industry and trade policies have been good for investors, with the sharemarket rising more during his term so far than they did during the Trump presidency. They are definitely less disconcerting for the rest of the world, other than China, than Trump’s.

Biden has left Trump’s tariffs in China in place and added to them in strategic sectors. No matter who wins in November, it is unlikely that there will be any meaningful shift in the direction of US policies towards China, although a Trump win might push some of America’s allies, particularly Europe, towards a warmer relationship with Beijing.

A decent performance from Biden in the debate would be reassuring to many investors, particularly those with an exposure to green technologies, although Trump and his “drill, baby, drill” mantra would be a positive for oil, gas and coal company stocks.

Trump’s agenda is, by any historical comparison, radical. It would generate uncertainty and volatility in financial markets, real economies and the geopolitical settings. If he were to demolish Biden in the debate, it will be interesting to see how financial markets respond.

The sharemarket is potentially vulnerable to an outbreak of volatility. Its big surge over the past eight months, driven by the boom in artificial intelligence stocks and Nvidia in particular, has occurred on top of a longer bull run in the major technology stocks. Amazon this week became the fifth US mega tech to have a market capitalisation of more than $US2 trillion ($A3 trillion).

Those big tech stocks, the so-called “Magnificent Seven,” have defied conventional wisdom, which would normally pull back their valuations in a relatively high-interest rate environment because of the impact of elevated discount rates on calculations of the net present value of their future cash flows.

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Their growth rates and cash flows, the absence of significant borrowings and the potentially transformative impact of AI have driven the value of the big tech stocks up by about a third so far this year. Nvidia, despite its recent rollercoaster ride, is up more than 160 per cent.

The mega-techs have been aided by the markets’ consistently more optimistic view on interest rates than the Fed’s, even as inflation outcomes have fallen short of what investors have priced in. At the start of this year, the expectation was for as many as six 25 basis cuts. Now investors are happy with two.

If the PCE number disappoints, or the debate unsettles the optimism that has buoyed markets and boosted the big tech companies as inflation edged down within a still-robust economy may be challenged.