Analysis note: Impacts of the American presidential elections on financial markets
Dear customers,
On the eve of the presidential elections in the United States, the markets are closely watching the results to come. This election could play a decisive role in asset performance in the short and medium term. According to our analyses, the American election may not cause immediate movements of more than 2% on the S&P 500. This is a phenomenon observed during past elections, which suggests a measured market response despite high expectations.
This note looks at the four main possible election scenarios and their potential implications for financial markets, while exploring the sectoral strategies to adopt.
1. Donald Trump's victory with Republican control of Congress:
Anticipated impact:
This scenario would offer an environment of pronounced deregulation, one of Trump's priorities under his 2025 agenda. This approach would favor the most regulated sectors, such as industry, consumer discretionary, and financial services, by reducing compliance costs and stimulating business growth in these areas.
Risks and opportunities:
- Bond yields and inflation: If Trump's tariff plans are reintroduced, they could lead to trade tensions, increase inflation, and increase costs for some businesses. These policies could also weigh on the American deficit, causing bond yields to rise. In the long run, this pressure on returns could hurt equity valuations.
- Sectoral opportunities: Sectors such as technology and real estate, which are less affected by deregulation policies, are expected to show relative resilience. For investors, this could present an opportunity to focus on these sectors in order to reduce the volatility associated with other more exposed segments.
2. Donald Trump's victory with a divided Congress:
Anticipated impact:
With a Congress dominated by Democrats, the Trump administration would see its deregulation efforts curbed. Its ability to adopt controversial policies, such as additional tariffs, may be limited. This scenario would create a moderate environment for stocks, with a balance between certain pro-market policies and legislative constraints.
Risks and opportunities:
- Policy neutrality: This scenario could maintain market stability due to the neutralization of political extremes. While tariff policies may cause short-term volatility, a divided congress could minimize abrupt policy changes, allowing for stability in economic and sector forecasts.
- Impact on export segments: Sectors exposed to trade, such as manufacturing, would remain vulnerable to changes in customs policies, but the probability of drastic decisions would be reduced.
3. Kamala Harris's victory with Democratic control of Congress:
Anticipated impact:
A Harris government with a Democratic majority in Congress would likely introduce substantial changes in business taxation, with corporate taxes expected to rise from 21% to 28%. This increase could reduce profits for businesses in certain sectors by nearly 5%, especially those where margins are already sensitive.
Risks and opportunities:
- Fiscal repercussions and public spending: The impact of tax increases could be partly offset by increased public spending, which could stimulate domestic demand. Sectors related to infrastructure, renewable energy and health care could benefit.
- Growth opportunities: Tax hikes could create investment opportunities in less affected segments, such as green tech and infrastructure, where federal spending would increase in line with Democratic priorities.
- Volatility risks: In the short term, the market could react negatively to less favourable fiscal policies. However, according to BofA, a withdrawal could be a buying opportunity, especially for long-term investors.
4. Victory for Kamala Harris with a Republican Congress (Status Quo Scenario):
Anticipated impact:
In this situation, the Harris administration would be held back by a Republican Congress, creating a policy environment that favors the continuity of current policies, and allowing markets to focus on economic fundamentals and Federal Reserve decisions. It would be a framework of stability where equity valuations could benefit from a return to elements of solid economic growth.
Risks and opportunities:
- Focus on the Fed and fundamentals: With an opposing Congress, drastic fiscal measures would be limited, strengthening the Fed's role in supporting economic growth. Monetary policy would thus remain a driving force for markets.
- Upside potential: A policy status quo could maintain current moderate growth, and the likelihood of further rate cuts would favor cyclical sectors and technologies.
Post-election conclusion and perspectives
Historically, the direction of the markets on election day tends to persist in the following weeks. Beyond immediate results, we expect that the Fed could intensify rate cuts in future meetings, in response to a moderation in the job market and a need for support to maintain growth.
We advise you to follow developments closely and to stay in contact with us to adjust your strategies according to the results. We will keep you updated on adjustment opportunities based on the implications of the election results.
