As the US election race enters its final straight with the candidates neck-and-neck, the economy looks likely to decide the winner. On the issue that voters say matters most – particularly in relation to the cost of living – the choice is clear. Donald Trump, who vows that “inflation will vanish completely” if elected, is promising to cut taxes and government spending alongside aggressive business deregulation. In opposition, Kamala Harris has pledged to raise taxes for the wealthy and big businesses to help fund a wider social safety net as part of her vision for an ‘opportunity economy’.
Whoever claims the White House keys will inherit a domestic economy in reasonable health that is odds-on to achieve a soft landing as inflation has steadily fallen. Interest rates are expected to drop from 5% to 3% in the next 12 months and GDP is forecast to grow both this year and next, according to consensus estimates.
Less positive for the new president are US government debt, which is around 115% of GDP and expected to continue rising, and a weakening dollar. Consumer confidence has also been falling recently, driven by slowing wage growth, rising unemployment and cost of living pressures.
Trump has been perceived by voters as having the safest hands with the economy, although his confused trade policy to tackle higher domestic prices has likely helped Harris erode this advantage in recent polls. He recently declared ‘tariff’ to be “the most beautiful word in the dictionary” and has threatened import duties of up to 100% if re-elected. Economic theory dictates that this would raise rather than reduce prices while most experts also believe that Trump’s broader agenda, which includes deporting millions of migrant workers and seeking greater involvement in the Fed’s interest rate decisions, is also likely to be inflationary.
While Harris has criticised Trump’s tariff plans, she seems unlikely to make changes to the taxes on Chinese imports he first imposed that were adapted by the current administration. Trump, in contrast, has promised blanket 60% tariffs on all goods from China and also a far more adversarial stance with existing trade ‘allies’. “Under my leadership we’re going to take other countries’ jobs,” he recently threatened, citing Germany and South Korea as targets.
Equity effect
So, what does this mean for stock markets and are returns likely to differ under the two candidates?
During Trump’s first term in office the US stock market was one of his favourite KPIs for the country’s (and his own) performance. The S&P 500 index rose 63% during his administration – a four-year period that included the steep COVID sell-off in 2020 – similar to its return since Joe Biden took over in 2021.
A key difference this time around is valuation with US equities priced at 22x forward earnings, compared to 17x in 2017 when Trump was first inaugurated. Data since 1988 shows that subsequent 10-year returns from the current higher multiple have averaged around 3% annually rather than 8% at the cheaper starting point, suggesting that Trump may need to find another yardstick for the nation’s health if he wins[1].
In the short-term, stocks have historically tended to be muted between election day and the year-end. The S&P 500 index is currently at an all-time high after climbing 22% this year – a similar return at the end of December would mark a second successive calendar year gain over 20%. Before we pop the champagne corks, it is worth considering that the last time we had consecutive 20%+ returns (1995-1998) it preceded a 50% drop when the internet bubble burst and it took another five years to reach a fresh all-time high.
Winners and losers
Today the biggest seven tech stocks represent almost a third of the US market’s total capitalisation, much larger than their 20% concentration at the peak of the dot com bubble, and while their contribution to earnings is also much bigger (21% versus 8%) this also increases the downside market risk for the next president if results disappoint. Howard Lutnick, co-chair of Trump’s transition team, recently said that tech companies like Apple and Tesla should expect to pay more tax if his boss is elected, which alongside a possible trade war with China, would negatively impact earnings.
Among the potential winners of Trump’s deregulation plans could be energy and financial services, two sectors that also tend to outperform in inflationary environments. While oil and gas companies would benefit under Trump, energy policy under Harris is likely to be more restrictive on fossil fuel producers and favourable for areas like renewables, green technology and EVs earmarked for huge investment under the Inflation Reduction Act (IRA) that she supported. The additional energy required to power AI will inevitably create expanded environmental pressures for whoever wins, including the extension of America’s coal runway.
Other Trump beneficiaries would likely be defence stocks and domestic car manufacturers. Pharma companies may also fare better by avoiding the healthcare reforms of a Harris administration and pressure to cut drug prices. Infrastructure, conversely, would likely be boosted by greater democratic government spending.
The election result could have greatest impact outside of the US. Alongside China – where some estimates suggest tariffs could halve the annual growth rate[2] – Trump’s policies to force companies onto American soil would hurt Mexico, a beneficiary of the ‘near-shoring’ trend, as well as ‘friend-shoring’ nations like Vietnam and Korea. It is perhaps unsurprising that emerging markets have historically fared better under a democrat president and, on balance, would likely do so again.
To conclude, the US election is one of the most significant events for global financial markets. With the race currently tied, assessing the probable policy winners and losers is especially difficult (and further complicated by the country’s two-chamber political system). We will monitor the result for any tangible impact on our holdings and use market volatility to our funds’ advantage.
It is important to remember that we invest long-term – often for periods that extend beyond political and economic cycles – and try to block-out short-term political noise, which is likely to be considerable over the next few weeks, regardless of who ends up sitting in the Oval Office.
[1] Source: JP Morgan, 30 September 2024.
[2] Source: Bloomberg, July 2024.