Election scenarios and probabilities

Significant market implications emerge from the stark contrast between the presidential candidates’ policies. While we believe portfolio construction should be an apolitical process no matter how distracting the lead-up to Election Day may be, here are our policy, economic, and market expectations for the most likely outcomes.

Blue sweep

Scenario analysis

Harris with a Democratic Senate and House

A Democratic sweep would likely be the most negative outcome for equity markets, primarily due to a higher probability of higher corporate tax rates. The expiration of some 2017 personal tax cuts could also be a small drag on consumer spending. Regulatory scrutiny could increase in some areas, but this would represent an extension of existing policy. The impact would be limited by recent Supreme Court decisions.

Policies

  • Marginal tax rate reverts to higher level for individuals in top brackets
  • Capital gains taxes increase for higher earners
  • Estate tax threshold reverts to lower level (higher estate tax)
  • State and local tax (SALT) deduction limitation rises
  • Corporate tax increase contemplated
  • Regulatory oversight is emphasized
  • Strict scrutiny of mergers and acquisitions (M&A) for antitrust violations
  • Inflation Reduction Act (IRA) spending plans and incentives remain in place
  • Existing tariffs persist, but foreign policy emphasizes strategic alliances and sanctions
  • Macro impact

    Overall economic impact likely to be smaller than Biden’s term. Taxes on higher-income households likely increase. Modest negative for economic growth. Disinflationary impact, leading to somewhat larger Fed rate cuts. Slightly negative for the USD.

  • Rates impact

    Interest rates likely to decline, led by the front end of the yield curve. The curve normalizes and returns to being upward-sloping given lower inflation and growth and larger Fed cuts.

  • Equity impact

    Slightly negative impact on equity market due to possible increase in corporate tax rates and potential for greater regulatory oversight. Positive for select companies within industrials, materials, and utilities focused on renewables and energy efficiency. Worst-case scenario for financial services and somewhat of a negative for the fossil fuel energy industry.

  • Energy

    Somewhat negative for the fossil fuel energy industry. Greater regulation could lead to higher costs for producers and higher prices for consumers. Curbs on oil and gas drilling activity are possible, but the Supreme Court’s decision in Loper Bright (Chevron deference) could curtail the level of agency activism. Risks to M&A activity could increase. Positive for the renewable energy industry.

  • Financials

    Worst-case scenario for financial services. Enactment of the Credit Card Competition Act would be more likely. New regulations and more stringent interpretation of existing regulations would likely continue to drive up costs. Critical rhetoric and headline risk could discourage or delay industry consolidation.

  • Industrials

    Greater congressional and regulatory oversight of aerospace and freight rail, but major legislation unlikely. IRA beneficiaries could experience a relief rally. Potential for more stringent pollution-related regulations on industrials, chemicals, and mining.

  • Technology

    Continued support for domestic semiconductor manufacturing.

  • Healthcare

    Regulatory oversight on managed care and continued antitrust scrutiny. Perhaps some effort to expand IRA drug price negotiating powers, although likely limits on how far Democratic senators in key biopharma employer states will go.

  • Consumer

    Possible further minimum wage increases, increasing ease of union organization and support for unions, likely negatively impacting restaurants and parts of retail.

  • Communication services

    A clean sweep increases the potential for legislative action related to Section 230 safe-harbor provisions (limits liability for internet service providers, but still allows them to moderate content). This is a potential risk for roughly 65% of sector market cap.

Harris with split Congress

Scenario analysis

Harris with a Republican Senate and Democratic House

If Harris wins but Congress is split, we would expect much more limited policy changes, and therefore a more muted impact on financial markets. A Harris administration would be obliged to rely on executive action and regulatory oversight to a significant degree, but recent Supreme Court decisions will likely curtail the ability of executive branch agencies to interpret federal statutes.

Policies

  • Marginal tax rate reverts to higher level for individuals in top brackets
  • No change to capital gains taxation
  • Estate tax compromise—threshold reduced but higher than full reversion
  • SALT deduction limitation rises modestly
  • No change to corporate tax rates
  • Greater regulatory oversight persists and could increase in some areas
  • Strict scrutiny of M&A for antitrust violations
  • IRA spending plans and incentives remain in place
  • Existing tariffs remain in place, but foreign policy emphasizes strategic alliances and sanctions
  • Macro impact

    Smaller impact than the blue sweep scenario. Taxes on higher-income households could rise but by less than in a blue sweep scenario. No corporate tax hikes but stringent regulatory oversight. Outlook for growth, inflation, monetary policy, and US dollar unchanged.

  • Rates impact

    Range-bound interest rates. Move in interest rates will be due to the lagged impact of sharply tighter Fed policy during 2022–23.

  • Equity impact

    Minimal impact on equity market. Positive for select companies within industrials, materials, and utilities focused on renewables and energy efficiency. Neutral to negative for the fossil fuel industry and the negative regulatory overhang on financial services would continue.

  • Energy

    Neutral to negative for the fossil fuel energy industry, though roughly the status quo with ongoing aggressive regulatory oversight of the energy industry, offset in part by the Supreme Court’s recent decision to overturn the Chevron doctrine (Loper Bright decision). Possible curbs on oil and gas drilling activity. M&A activity should continue but with ongoing regulatory risks. Neutral to positive for the renewable energy industry.

  • Financials

    The regulatory pendulum, which has swung against the industry in recent years, would likely remain a constraint. Anti–big financial services company ideology would remain in place.

  • Industrials

    Greater congressional and regulatory oversight of aerospace and freight rail, but major legislation unlikely. IRA beneficiaries could have a relief rally. Potential for more stringent pollution-related regulations on industrials, chemicals, and mining.

  • Technology

    Continued support for domestic semiconductor manufacturing. Regulatory scrutiny of large tech companies likely to continue.

  • Healthcare

    Limited ability for Harris to push any legislation. Continued focus on increased regulatory and antitrust oversight, mainly impacting managed care and providers.

  • Consumer

    Continued regulatory oversight but limited direct impact on consumer companies.

  • Communication services

    Limited impact as the status quo likely continues, with continued scrutiny of the big tech companies within the sector.

Red sweep

Scenario analysis

Trump with a Republican Senate and House

An extension of the 2017 tax cuts would be likely, but the high price tag complicates other tax proposals, such as a further reduction in corporate tax rates. Funding for these initiatives might come from a reduction in support for green energy provisions of the Inflation Reduction Act. Equity markets would likely cheer lower taxes and lighter regulation, but this could be partially offset by concerns about the costs and inflation impacts of higher tariffs and trade wars. Interest rates and the dollar would likely rise initially. Financials stand out as key potential beneficiaries in this scenario due to lighter regulation.

Policies

  • Lower marginal tax rates extended or made permanent
  • No change to capital gains taxation
  • Higher estate tax threshold extended or made permanent (lower estate tax)
  • SALT deduction limitation rises modestly
  • Corporate tax decrease contemplated
  • Regulatory oversight decreases, especially for energy and financials
  • Reduced scrutiny of M&A leads to increased activity
  • Partial rollback of specific IRA incentives possible
  • New tariffs implemented on selected imports, universal tariffs possible but may face legal challenges, and China targeted for higher tariffs
  • Macro impact

    Overall economic impact is mixed. Inflationary pressure increases, resulting in fewer Fed rate cuts. Positive for the USD at least initially, but higher deficits and trade tensions could later undermine the dollar.

  • Rates impact

    Interest rates likely increase led by the back end of the yield curve due to inflationary pressures. Increased Treasury supply due to rising deficit also pushes longer-end yields higher. Heightened interest rate volatility due to geopolitical concerns ensues.

  • Equity impact

    Slightly positive equity market impact. Less regulation, potential for more M&A would be supportive, but a stronger USD, higher tariffs, and inflationary pressures would be headwinds. Most positive scenario for the fossil fuel energy and financial services industries. The consumer discretionary, industrials, and information technology sectors would most likely be negatively impacted by higher tariffs.

  • Energy

    Most positive scenario for the fossil fuel energy industry. Regulatory and legislative risks decline. Industry would likely maintain lower emission investments (e.g., methane). Oil and natural gas investment could increase. Industry consolidation, more drilling activity, and higher exports of natural gas. Negative for the renewable energy industry.

  • Financials

    Best case scenario for financial services. A potentially more favorable (less punitive) regulatory environment could emerge that could lead to cost savings and greater ability to return capital to shareholders. Financial services industry consolidation could face less political or regulatory resistance.

  • Industrials

    Less support for green energy initiatives could crimp investment spending in this area. Less onerous pollution regulation. A reimposition of tariffs could drive up US metals, supporting steelmakers but hurting heavy manufacturing.

  • Technology

    Continued support for domestic semiconductor manufacturing. Increased tariffs could have direct and indirect impacts on hardware and semiconductor companies, with negative implications for smartphone manufacturers. Additionally, blowback from China could be a headwind for non-domestic vendors and their suppliers.

  • Healthcare

    Most likely less regulatory oversight on healthcare. However, Trump’s prior proposal for an international drug pricing index would be quite negative for biopharma. Lower antitrust oversight would enable more consolidation, which would be fueled by pressure on drug pricing.

  • Consumer

    Tariff risk. This would impact retailers. Most goods sold by US retailers are imported (apparel, footwear, sporting goods, small household appliances, electronics, etc.). China is still a major manufacturing hub for all these products.

  • Communication services

    A clean sweep increases the potential for legislative action related to Section 230 safe-harbor provisions (limits liability for internet service providers, but still allows them to moderate content). This is a potential risk for roughly 65% of sector market cap.

Trump with split Congress

Scenario analysis

Trump with a Republican Senate and Democratic House

With major fiscal policy changes blocked by a split Congress, higher tariffs and lighter regulation would likely be the hallmarks of this election outcome. Overall, these two forces would have a mixed impact on equity markets. The dollar and interest rates would likely rise modestly. Financials would likely be key beneficiaries of lighter regulation.

Policies

  • Marginal tax rate reverts to higher level for individuals in top brackets
  • No change to capital gains taxation
  • Estate tax compromise—threshold reduced but higher than full reversion
  • SALT deduction limitation rises modestly
  • No change to corporate tax rates
  • Regulatory oversight decreases, especially for energy and financials
  • Reduced scrutiny of M&A leads to increased activity
  • IRA incentives and spending plans remain in place
  • New tariffs implemented on selected imports, universal tariffs possible but may face legal challenges, and China targeted for higher tariffs
  • Macro impact

    Overall economic impact should be positive but less than in red sweep scenario. Tariffs still add to inflationary pressure, making it more difficult for Fed to cut rates aggressively. Positive for the USD initially, but higher deficits and trade tensions could later undermine the dollar.

  • Rates impact

    Slightly higher interest rates in line with the stronger USD. Volatility rises due to geopolitical risk and ambiguity over the Fed reaction function.

  • Equity impact

    Mixed equity market impact. Less regulation and potential for more M&A would be supportive, but a stronger USD, higher tariffs, and inflationary pressures would be headwinds. A likely easing in regulatory risks should benefit the fossil fuel energy and financial services industries. The consumer discretionary, industrials, and information technology sectors would most likely be negatively impacted by higher tariffs.

  • Energy

    Somewhat positive for the fossil fuel energy industry as regulatory risks would likely decline. Industry would likely maintain lower emission investments (e.g., methane). Likely a clearer regulatory path toward the necessary investment for industry consolidation, increasing drilling activity and exports of natural gas.

  • Financials

    The appointment of new regulatory heads at the Fed, FDIC, OCC, and SEC would likely be positive (personnel is policy). Although regulatory costs could ease somewhat, a Democrat-led House could hold anti–financial services hearings, which could lead to negative headline risks for the industry.

  • Industrials

    Uncertainty around green energy initiatives could crimp investment spending in this area. Less onerous pollution regulation. A reimposition of tariffs could drive up US metals, supporting steelmakers but hurting heavy manufacturing.

  • Technology

    Continued support for domestic semiconductor manufacturing. Increased tariffs could have direct and indirect impacts on hardware and semiconductor companies, with negative implications for smartphone manufacturers. Additionally, blowback from China could be a headwind for non-domestic vendors and their suppliers.

  • Healthcare

    Limited bipartisan legislation is possible. Legislation affecting pharmaceutical prices could be one area of potential bipartisan compromise.

  • Consumer

    Tariff risk. This would impact retailers. Most goods sold by US retailers are imported (apparel, footwear, sporting goods, small household appliances, electronics, etc.). China is still a major manufacturing hub for all these products.

  • Communication services

    Limited impact as the status quo likely continues.

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