The results of the upcoming US presidential election will have significant market implications due to the stark contrast between the candidates’ policies, analysts at UBS believe.
The analysts, noting that portfolio construction should be an apolitical process “no matter how distracting the leadup to the election may be,” have outlined their market expectations for the most likely outcomes.
They see a “Blue Sweep,” being a victory by Democratic candidate Kamala Harris and a Democratic Senate and House, as the most negative outcome for equity markets primarily due to a higher probably of increased corporate tax rates.
“Within equities, we think it would be a positive for select companies within industrials, materials, and utilities focused on renewables and energy efficiency, but a worst-case scenario for financial services and somewhat of a negative for the fossil fuel energy industry,” they wrote in a note to clients.
“Interest rates would likely decline, led by the front end of the yield curve, reflecting lower inflation and growth plus larger Fed cuts. It would likely be slightly negative for the USD.”
They put the probability of a “Blue Sweep” at 15%.
More likely, at a probability of 40%, is a Harris win with a split Congress (Republican Senate and Democratic House).
Analysts see this outcome resulting in 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,” they wrote. “We see little immediate impact on the outlook for growth, inflation, monetary policy, and US dollar.”
Meanwhile, they see a 35% probability of a “Red Sweep,” referring to a victory by former president and Republican candidate Donald Trump and a Republican Senate and House.
They see financial markets benefitting in this scenario due to lighter regulation.
“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,” analysts wrote.
The least likely outcome is a Trump victory with a split Congress at a 10% probability, analysts believe.
“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,” they wrote.
Shift in momentum
The analysts noted that their latest probabilities account for the changed dynamics of the election, altered by the replacement of President Joe Biden with Harris as the Democratic candidate in July.
“Recent polls suggest Harris is better positioned in a head-to-head contest against Donald Trump. She has gained more than six points in national polls and improved on Biden’s position by a similar margin in some of the critical swing states,” they wrote.
“Meanwhile, former president Trump’s prospects in some key states have dissipated in recent weeks, and independent candidate Robert F Kennedy, Jr. also appears to be fading as a factor in the November outcome.”
Analysts emphasized that investors should avoid making major portfolio changes in response to campaign developments or in anticipation of a particular election result.
They did, however, recommend reviewing and addressing portfolio overexposure to election-sensitive sectors, currencies, and countries.
“We continue to advocate for portfolio diversification to dampen bouts of volatility, to broaden sources of return, and to help investors avoid behavioral bias into key risk events,” they wrote.
“We remain constructive on gold amid a backdrop of geopolitical tensions, a rising US fiscal deficit, and impending Fed rate cuts.”
Gold prices continued to move higher on Tuesday, with the spot price hitting an all-time high of $2,531.60 during the session.