US elections now at the finish line and four possible scenarios, summarized by Elliot Hentov, Head of Macro Policy Research at State Street Global Advisors, which analyzes the potential impact on sectors and asset classes.
- A Republican victory with complete control of all areas of the federal government
- Trump victory with a divided Congress, where Democrats control the House and Republicans have a majority in the Senate
- Harris victory with a divided Congress as in scenario 2
- A total victory of the Democrats
In terms of probabilities, “we believe that the presidential race remains uncertain, and that a divided Congress is also likely (i.e., odds well above 50%). Between the two outcomes at the extremes of the expected scenarios, a Republican victory appears much more likely than a Democratic one, which we consider a remote eventuality.”
Bonds versus stocks
The expert then analyzes the potential impact on Treasury, on US stocks and on dollar based on the various main scenarios. The combination of fiscal and monetary policy “will largely determine the slope of the yield curve. While we expect a soft landing and no near-term recession, we believe the yield curve will be driven by macroeconomic fundamentals under most election scenarios.”
The exception “would be representedto a Republican victory (Scenario 1), which could cause an irregular steepening of the curve by raising inflation expectations, in the wake of debt-financed tax cuts, higher tariffs, tighter labor market policies and changes to the governance of the Federal Reserve. These factors could also strengthen the dollar despite the desire to Trump to weaken it.”
Stocks would likely “see volatility, as some sectors benefit from tax cuts and favorable regulatory changes, while others face higher financing costs. Scenario 2 would include the same regulatory stimulus, but the fiscal framework would, in our view, be muted, resulting in more modest currency appreciation and only a slight steepening of the yield curvethe. In contrast, we expect the bond market to largely ignore the election in Scenario 3, viewing it as status quo. In either case, the stock market would likely react with relief to the end of election uncertainty and tend to perform higher towards the end of the year, following the typical seasonal trend. A clear Democratic victory appears to be a negative factor for stocks due to more expansive regulation and increased taxes on both corporations and high income earners.”
Industry-specific assessments
In 2016, the S&P 500 index it increased only 3% in November after the election. However, Trump’s surprise victory resulted in a significant dispersion of 17% between the best-performing (financial) and worst-performing (utilities) sectors. In 2020, there was considerable sector volatility in the run-up to the election, and subsequently, the S&P 500 Index rose 8% through the end of November, with energy stocks outperforming by a clear margin. 27% compared to the weakest sector, that of utilities. For 2024, we expect dispersion to be much more contained than in the previous two cycles. However, there are noteworthy performance differences depending on the political context.
Both net victory scenarios – the analyst explains – would imply changes in the fiscal trajectory and in federal tax legislation (as well as larger fiscal deficits). Trump proposed therepeal of parts of the Inflation Reduction Act (IRA), which could undermine the tailwind that industrialists currently benefit from. More critically, some elements of the Tax Cuts & Jobs Act (TCJA), introduced by Trump in 2017, will expire in 2025. While technically “permanent” at 21%, the corporate income tax rate could see an increase, becoming a bargaining chip to finance the extension of other tax breaks (e.g., the top individual tax rate, as well as pass-through beneficiaries for business owners) – something we see as more likely under a Harris administration. In 2017, the proposed cuts favored IT stocks, banks and insurance companies, domestically sourced consumer goods companies, and real estate investment trusts (REITs). These sectors could be disproportionately impacted by any turnaround. Kamala Harris’ recent agenda on tax increases (e.g., raising the corporate tax rate from 21% to 25% to 28%, quadrupling corporate taxes 4% share buyback, the repeal of the foreign intangible income deduction) could have a negative impact on the stock market as a whole, as well as on discretionary consumption in the United States. However, his commitment to industrial policy could support industrial stocks.
Regulation, who benefits and who is at risk?
A wave of deregulation “it could be advantageous for the financial sector, particularly for banks, but would likely have a smaller scope than that of the previous Trump administration. Higher rates and a steeper yield curve should benefit banks’ margins, although this could be offset by a slower loan growth and by an increase in default rates for credit institutions. The financial sector and other sectors could also benefit from the changes foreseen by the Republican program regarding sustainable investments, with fewer requirements on carbon footprint reporting and limits for the investment industry in developing and marketing products linked to environmental, social and governance (ESG). This would further amplify the operational differences between US and European asset managers. The regulatory path under Harris would mirror that of Biden, including continued antitrust interventions, although a Democratic Congress would help tighten rules to pressure companies to decarbonize.”
Foreign policy, will rearmament continue?
Our detailed views on the geopolitical effects are outlined in a recent article. “A Trump presidency is expected to strengthen defense spending growth among G7 countries, benefiting arms suppliers. Furthermore, Trump’s penchant for tariffs on capital goods and likely reshoring would also strengthen the competitive position of the industrial sector, particularly in the United States.”
Harris’ relatively brief background in national politics before becoming vice president provides limited insight into her personal views on foreign policy. We expect him to maintain the status quo, apart from a perhaps less favorable approach towards Israel.
Trade, duties and geopolitics
While tariffs are increasing anyway, “they could be more tumultuous with Trump. Expectations for a Trump 2.0 administration include the imposition of punitive trade tariffs on Chinese goods, as well as selective tariffs on other exporters with net surpluses or countries not aligned with the United States. The overall inflationary impact on the consumer price index (CPI) would be less than 0.5%, but it could mean a significant increase in prices for imports in selected sectors.”
Energy, are we getting closer or further away from the transition?
Initially, the energy sector he seemed to be the biggest beneficiary of a new Trump presidency. This is still true, but Harris has significantly moderated her energy policy agenda and so the gap is not as wide as expected. Potential Republican actions “could affect the extent of operations on the fossil fuels and a reversal of environmental regulation. An expansion in the size and scope of drill pipe would be relevant to major oil and gas operators and would likely see the US consolidate its position as the world’s largest crude oil producer.”
In recent times, the energy sector “has seen a simultaneous decline with that of oil prices, due to concerns about a slowdown in demand on the part of China and the United States. THowever, we foresee favorable factors both from a geopolitical point of view and for the possibility of high and lasting inflation. Conversely, this scenario could push investors to reduce exposure to utilities, which would benefit less from the shift towards renewable energy under a Republican-dominated executive. However, Republican support for the construction of new data centers, the demand for which is growing rapidly thanks to use stimulated by AI, offers a positive outlook for electricity demand.”
The duration of the subsidies and credits provided by the IRA “remains subject to dispute, but on this issue Trump appears to have moderated the risks associated with cuts to incentives for the production and ownership of electric vehicles. Such cuts would negatively impact the automotive, component manufacturing and charging station provider sectors, which primarily fall within the consumer discretionary sector.”
Healthcare, a way to reduce costs?
This was not a focused election healthcare. Even under a unified Republican government, we do not expect theAffordable Care Act be repealed. Selective threats to premium tax credits set to expire in 2025 and the removal of coverage for certain segments of the population are a negative for managed care names and would put hospitals at greater risk for care uncompensated. A total Democratic victory scenario, in which prescription drug prices for Medicare and would be reduced, may be more difficult a cap on insulin costs and those out-of-pocket for drugs could weigh on pharmaceutical stocks.
In conclusion
Identifying the sectors most likely to benefit from the election outcome “is difficult in a close race. However, there are specific segments that are more sensitive to elections. At a sector level, we believe changes in regulatory burden and trade policies carry the most weight. Meanwhile, at the asset class level, the impact on inflation and rates is the key variable. As in the past, investors may implement their views across sector allocations, both in the United States and internationally, to optimize portfolios based on the outcome of this year’s elections”, concludes the analysis.
