With a month to go before election day, the presidential race remains tight with Kamala Harris maintaining a slight lead over Donald Trump. Based on the prediction markets, the two most likely outcomes are either a Republican sweep or a Harris presidency with a divided government. This is due to races for the Senate favoring the Republicans.
Different presidential and congressional configurations will dictate how much legislation can be passed and ultimately how much an effect politics will have on stocks and the economy. A sweep scenario can lead to drastic changes in tax and spending policies. With a divided government, regulation and trade policy will come into play, because those are the areas where the president can act unilaterally.
Taxes
The new president will face a unique tax situation because major elements of the TCJA, the Trump tax cuts, are sunsetting in 2025. If nothing is done, almost every taxpayer will see a higher average tax rate. This should act as an incentive from both sides of the aisle to negotiate and extend some of these expiring provisions.
Kamala Harris recently released tax proposals to dramatically increase the tax rates on corporations and high-income households while leaving most Americans taxes unchanged, promising to protect households making under $400,000 from higher taxes. Her tax goals are unlikely to become reality, however, unless the Democrats retain control of the Senate and flip the House of Representatives.
Meanwhile Donald Trump would likely prioritize extension of the TCJA, including reinstating individual provisions that expired, including business depreciation allowances such as immediate expensing for equipment, property and research and development.
Regulation
From a regulatory standpoint, Harris is focused on prescription drugs, more affordable housing, a higher minimum wage, lower grocery costs and a supportive stance toward clean energy. She has also talked about accelerating Medicare negotiations on more drugs and cracking down on pharmacy benefit managers, creating more risk in health care.
Trump significantly dialed back regulation in his first term. Most of the former president’s efforts on the deregulation front will likely be focused on labor, education, the environment and health care, with a slowdown in the transition to EVs. Energy production and fracking in particular should increase. A potential negative, at least from a labor market perspective, is more stringent immigration policies, which could hurt labor-intensive companies.
It’s worth noting, however, that the expected election outcomes due to regulation are usually very different from what ends up occurring. The consensus thought energy would thrive under the Trump administration, yet it was one of the worst-performing sectors in his four years. Under Obama, health care was expected to be a tough sector, but it performed well on a relative basis. So, it’s important not to read too much into higher regulation and what the impacts will be for these sectors.
Trade
Harris is expected to mostly maintain the status quo on trade policy from the Biden administration. Changes are expected to be more surgical compared to the broad brush approach Trump has discussed. Harris would likely remain firm on China to protect industries like solar and semiconductors.
From a Trump perspective, we expect a repeat of what we saw under his first term. He is proposing two types of tariffs: a 10% across the board tariff on all imported goods and increases on Chinese tariffs to 60%. According to a Tax Foundation analysis, a 10% tariff and retaliation from U.S. trading partners would be expected to contract the economy by 1%. From a trade perspective, equities would face more headwinds under Trump while a Harris win would continue the status quo.
Fiscal Spending
The most bipartisan view right now is that government spending will keep growing. Neither candidate wants to rein in spending. Deficits are forecast to be in the 6%–7% of GDP range for the foreseeable future and potentially even higher in a sweep scenario where more legislation gets passed. Harris would prioritize spending on health care, housing, childcare, clean energy and infrastructure.
Trump is expected to keep spending focused on defense and infrastructure. The fiscal thrust from a Republican administration will come in the form of tax cuts, while the Democrats will likely lead with more spending. We expect such policies to boost the economy in either scenario.
Impacts of a Trump Victory
In aggregate, we view a second Trump presidency under a sweep scenario as net positive for equities. The expectation is for a more favorable corporate tax regime and less of a regulatory burden, both of which should boost corporate profits. Conversely, there is the potential for increased tariffs and retaliation from U.S. trade partners. A gridlock scenario where the House is under Democratic control would be mildly negative as fewer provisions of expiring tax legislation would get extended.
We view U.S. stocks as best placed under Trump, with banks and capital markets, as well as the oil and gas complex, well positioned due to lighter regulation. Aerospace and defense is also likely going to benefit as well as biopharmaceuticals.
Impacts of a Harris Victory
We see a Harris win as mildly negative to equities should she preside over a divided Congress. It will be more of a headwind to the markets should we see a Democratic sweep as she will then be able to implement higher taxes on corporations and high-income individuals, as well as push a more ambitious regulatory agenda. However, tax credits for low-income individuals would provide an offset, creating an economic boost to this segment of the economy.
Tighter regulation could weigh on biopharmaceuticals, banks, capital markets, energy as well as mega cap technology. Areas to be bullish about under Harris would be consumer discretionary, specifically restaurants & leisure, home building and building products.
It’s easy to categorize each candidate as bullish or bearish, but markets have gone up regardless of the party in control. In our view, economic momentum will be a bigger driver of equities over the medium to long term.
Jeffrey Schulze, CFA, is Director, Head of Economic and Market Strategy at ClearBridge Investments, a subsidiary of Franklin Templeton. His predictions are not intended to be relied upon as a forecast of actual future events or performance or investment advice. Past performance is no guarantee of future returns. Neither ClearBridge Investments nor its information providers are responsible for any damages or losses arising from any use of this information.