Staying focused on Election Day

ElectionWatch: Election first take:6 November at 13:00 ET

The US is set to go to the polls and investors need to be prepared for potentially significant market movements over the next few days. We believe that investors should prepare to use any outsized market reactions in the coming days to build better portfolios for the long term. We see potential opportunities to build positions in equities, China, bonds, and gold, and to diversify US dollar holdings.

We believe that US equities are Attractive and should be supported by benign growth, lower rates, and structural support from AI, regardless of the election result. Investors should be prepared to capitalize on market dips to build long-term positions, particularly in the technology, utilities, and financials sectors.

We see a potential opportunity emerging in Chinese equities: A Harris victory would allow investors to focus on an improving fundamental picture, while any substantial market correction under a Trump victory could present a buying opportunity.

In fixed income, bond yields have risen substantially in recent weeks; we believe that currently elevated yields offer a chance to lock in attractive rates and improve portfolio diversification, with lower interest rates ahead regardless of the election victor.

In currencies, although the US dollar could strengthen in the near term in the event of a Trump victory, we anticipate medium-term dollar depreciation regardless of the winner and suggest that investors consider using periods of strength to diversify dollar exposure toward other G10 currencies.

Finally, we believe that gold remains a valuable hedge against geopolitical and economic uncertainties, and we expect further gains for the precious metal in both Trump and Harris scenarios. While a Trump victory might accelerate gold's rise, a Harris victory would likely see a steadier climb.

More to go in US equities, regardless of the victor|
While some equity market volatility this week is inevitable, we do not expect the likeliest election outcomes to change our 12-month view on US equities. We expect the S&P 500 to rise to 6,600 by the end of 2025, equating to a roughly 15% price return from current levels, driven by our expectations of benign US growth, lower interest rates, and the continued structural tailwinds from AI. We expect these market drivers to remain in place regardless of who wins the US election.

At a US sector level, our preferences include technology, utilities, and financials.

In technology, a Trump win could have a slight negative impact in the near term, as markets may fear the impact of tariffs on earnings for hardware and semiconductor companies. But we do not believe this should outweigh the structural growth story over the medium term. AI infrastructure spending remains robust as businesses experiment with AI use cases and companies race to stake out leading positions. We expect semiconductor components needed for AI will remain supply constrained into next year, supporting pricing. A Harris victory would largely be a status quo outcome that shouldn’t significantly change investor expectations.

Parts of utilities could experience a bit of a relief rally in a Harris win, as ongoing government support for renewables would be more assured. Conversely, renewables-leveraged companies could face some pressure in a Trump victory. However, even in this scenario, renewables demand likely would remain strong as businesses, states, and municipalities focus on decarbonization goals. More fundamentally, we expect significant growth in AI data centers to drive solid growth in power demand and higher power prices. In addition, we think the sector's defensive characteristics should offer ballast in a portfolio in the event economic growth concerns arise.

US financials could face short-term headwinds under a Harris victory, as investors price out any deregulation benefits from a Trump win. Still, we think the medium-term outlook would remain positive, supported by a robust economy and a potential pickup in activity in areas such as business lending and M&A due to Federal Reserve rate cuts. A Trump victory could presage deregulation and would likely be an immediate positive for the sector.

Higher bond yields present a chance to prepare for lower rates
In recent weeks, a combination of stronger US economic growth data and market anticipation of a potential Trump victory has led to higher bond yields across the curve. We now believe that yields are too high, regardless of who secures the presidency.

Our 10-year Treasury yield forecast is 3.5% for June 2025. While we would expect yields to land somewhat higher than 3.5% under a Trump presidency, we would still anticipate positive returns for bonds over the coming 12 months. We do not expect the election result to shift the Fed from a path toward lower interest rates, and inflation remains on a downward trajectory.

We have been advocating that investors "prepare for lower interest rates" by deploying cash into medium-duration fixed income. Today’s elevated bond yields provide investors with an opportunity to do that. We recommend deploying cash to lock in yields while attaining a strong portfolio diversifier.

Potential opportunities arising in China
We expect the US election outcome to lead to significant short-term volatility in Chinese equities. While both candidates are likely to be "tough on China," fears about the potential 60% tariff on Chinese imports to the US proposed by Trump could be particularly impactful. However, short-term volatility could give rise to an opportunity for longer-term investors.

A Trump victory would be a negative development for the earnings of Chinese companies. But risks are well-known. Chinese equities are already inexpensive. A Trump victory could see Beijing front-load stimulus spending more aggressively. And US-China trade already fell meaningfully during Trump’s first term, with MSCI China’s revenue exposure to the US now below 5%. Additionally, we do not expect a 60% tariff to ultimately be implemented in our base case. In our view, Trump is likelier to negotiate with Beijing, with eventual tariffs being more targeted in scope.

As such, if Chinese markets were to fall by 10% or more in case of a Trump victory, we would view this as pricing sufficient near-term downside risks to consider adding to China equity positions.

Meanwhile, we believe that a Harris victory would remove an important overhang from Chinese equities and allow investors to focus on low valuations, the potential for additional stimulus, and strong earnings growth. Provided the market does not rally by more than 10%, all else equal we would consider Chinese equities appealing in the event of a Harris victory.

From a currency perspective, a Trump victory would likely see the Chinese yuan depreciate, while a Harris victory would likely see it appreciate. USDCNY currently trades around 7.1. We see it trading toward 7.4 after a Trump victory, and toward 6.8 after a Harris victory.

Sizing the downside for the dollar
We have a negative view over the medium term on the US dollar, forecasting EURUSD to rise to 1.16 by September 2025. Fundamentally we believe a combination of the dollar’s overvaluation, a shrinking yield advantage over other currencies, and the US’s significant twin fiscal and current account deficits is likely to weigh on the currency regardless of the victor.

We would expect the dollar to be somewhat stronger under Trump than Harris. More pro-growth policies, likely higher interest rates, and tariffs could all provide tailwinds to the dollar. Nonetheless, from today’s levels, we would expect dollar depreciation regardless of the victor.

Investors should therefore prepare to use periods of dollar strength that may emerge after the election to diversify or hedge currency exposure and mitigate the risk of dollar depreciation on portfolios.

Gold: potential gains, fast or slow
Gold prices have rallied sharply this year, and from today’s levels, we expect further gains for gold regardless of who wins the White House, though the election result could affect how quickly we reach our USD 2,900/oz target for September 2025.

In case of a Trump victory, we would expect gold prices to rally sharply in response, as markets price potentially higher rates of inflation and geopolitical uncertainty.

In case of a Harris victory, we would expect the reaction in the gold market to be more muted initially. But we would expect gold to regain its footing thereafter, as markets refocus on the dollar and interest rate outlook, as well as persistently robust investor and central bank demand.

As we approach the US election, it's crucial for investors to remain focused on their long-term strategies. While the election outcome may introduce volatility, it should be seen as an opportunity to strengthen portfolios for the longer term.