US election: Clean sweep or lengthy recounts?

Preview

Will there be a clean sweep by either the Democrats or the Republican parties, and will there be lengthy recounts? These are two questions to focus on when looking at the financial market implications from a win by either Kamala Harris or Donald Trump.

With the US presidential election fast approaching, we assess the potential impact on markets based on the two candidates’ proposed economic and international policies.

We conclude that a Trump presidency could lead to a more inflationary environment, but one potentially more supportive to corporate profits and earnings growth from lower taxes. Blanket tariffs, with a particular focus on China, could contribute to inflation and a more hawkish US Federal Reserve (Fed). With a stronger US dollar (USD), and with less certainty around his international policies, this increases the risk for international and emerging markets (EM) equities.

In contrast, a Harris presidency could have a negative impact on corporate profits from higher corporate tax rates, but this might be supportive of a benign inflationary environment. With a dovish Fed and a potentially weaker USD, this may be supportive for both EM equities, which tend to be supported by USD weakness, international equities, and the bond market. Less uncertainty on Harris’s international policies, given a likely continuation of Joe Biden’s, should result in less overall volatility across global financial markets.

Both candidates need to consider the impact of the expiry in 2025 of trillions of dollars of tax breaks from Donald Trump’s 2017 Tax Cuts and Jobs Act. If there are no cuts in fiscal expenditure, any benefits from the tax rises will be spent and the US budget deficit will remain at approximately 6% of Gross Domestic Product (GDP)¹.

The key aspect to watch will be whether either candidate wins with a clean sweep, which would permit the winning candidate to apply more of their policy initiatives in a more meaningful manner. It all hangs on seven swing states, where polls are so narrow that the race is too close to call. There is also a risk of lengthy recounts, which could weigh on markets near term. Volatility in markets around the day of the results could open up a good opportunity for investors who focus on the longer-term picture, and who focus on fundamental dynamics for businesses and the economy.

In this report, we first summarise the implications the market and economy, then look at each sector in turn.