US Election Insights: How Five Key Policy Differences May Drive Asset Class Positioning

In the lead-up to the US election, investors are gauging the impact of an extremely tight presidential race and potential shifts in the dominant party for both houses of Congress. While for both candidates many policy specifics have yet to come into focus, we provide our view of the likely outcomes for their positions more broadly, what they could mean for core asset classes, and how investors may best position amid the uncertainty.

A true horse race

Polls and betting odds continue to show a neck-and-neck race between Vice President Kamala Harris, the Democratic candidate, and former president Donald Trump, the Republican nominee. The makeup of the Senate and the House of Representatives are equally uncertain. If Harris wins, the Democrats look poised to take back the House but lose the Senate; if Trump wins, we would expect a (tight) Republican sweep of both the House and the Senate.

The candidates’ policies diverge widely on certain points that will affect asset markets, though we see overlap in others. Below are the top five we expect to have the greatest impact:

1. Taxes: the biggest point of divergence. Trump’s individual and corporate tax cuts under the Tax Cuts and Jobs Act of 2017 are set to roll off at the end of 2025. While we would expect Republicans to maintain these cuts, a Harris win or a split Congress is likely to usher in a return to Obama-era tax policy; essentially, keeping tax cuts for lower-earning individuals but renegotiating other areas of tax policy, particularly on high-earning individuals and corporations.

2. Antitrust policy: looser under Trump, but both candidates are skeptical of Big Tech. Under President Biden, the Justice Department and the Federal Trade Commission (FTC) have been aggressive about blocking mergers and acquisitions. While we believe Harris could shift her stance somewhat given grumbling among some key donors, we would not expect a 180-degree turnabout on antitrust policy. Trump, on the other hand, is likely to take a much more hands-off and deregulatory stance, and we would expect him to replace FTC Chair Lina Khan with a Republican appointee. Both parties seem to agree, however, that Big Tech may be getting too big and would be wary of consolidation in the industry.

3. Fiscal spending: elevated in either outcome. While spending might rise somewhat under Harris, we think it is also unlikely to decrease under Trump. While the Inflation Reduction Act did not garner a single Republican vote when enacted in 2022, we believe that it will be difficult to achieve similar unanimity for a full repeal, given that the fiscal stimulus is being felt in industries that are typically supportive of the Republican agenda as well as in many districts and states represented in Congress by Republicans.

4. China trade policy: A hawkish stance will prevail either way. While neither the Democrats nor the Republicans are dovish on China, Trump is more aggressive – proposing even bigger tariffs on China than his planned universal tariff of 10% to 20% on all imports. That said, the Democrats and Vice President Harris have also moved toward a harder line on China.

5. Geopolitics: A big split on Ukraine. Harris and Congressional Democrats would likely maintain support for Ukraine as the war with Russia wears on. Trump and a large portion of the House Republican Conference, on the other hand, have been less supportive and would likely pare back aid in a Republican sweep.

Multi-asset portfolios: assessing the macro risks

In some ways, we view a Harris win as a “status quo” outcome that would likely continue existing policies and entail a slower-moving process for policy shifts – especially given Harris’s shorter timeline as the Democratic candidate. While the details of her agenda are still coming into focus, it would likely be a somewhat higher-tax, higher-spend agenda that could spur bigger moves in non-US assets – with emerging markets (EM), particularly Mexico, and Chinese assets getting relief that could be priced in. On the flip side, this would not be as good for US assets.

Under a Trump win, if history is any guide, we can expect a somewhat tumultuous environment with a lot of uncertainty. However, we think the playbook would look quite different from Trump 1.0. While a Trump win could be viewed as a short-term tailwind for markets, the picture looks quite different over the longer term: Aggressive tariffs and an immigration clampdown are economic negatives that the market would have to absorb, though deregulation could help offset their impact.

In a multipolar world, “tariff adversaries” (e.g., Mexico and China) would likely ramp up their response to counter US pressure, and Europe also would not come out unscathed; while rerouting of trade benefited Europe the first time around, universal tariffs would hit the Continent as well.

We would expect deficits to remain high under either candidate but even higher under Trump, which could push bond yields higher; it’s harder to gauge the impact for equities and other risk assets, but we see no runaway market win.

We would also expect a bigger ramp-up of defense spending under Trump and greater spending on the energy transition under Harris.

Overall, we view a Trump win as more challenging for the rest of the world than for the US, and additive to the existing strengths of US assets.

Equities: It’s all about sector weights

While our research process is focused on bottom-up analysis of specific companies, we do need to be mindful of our net exposure to sectors that could be affected by the election. In a Harris win with more of a status quo outcome, we would expect little change to sector-specific fundamentals, with industrials poised to continue to benefit from the three key long-term trends of near-sourcing, green spending, and automation.

In a Trump-win scenario, deregulation, lower taxes, and a potential relaxing of anti-trust regulation would clearly benefit financials. US industrials would also likely benefit from Trump’s “Made in America” policy leanings, while a Trump win would be a net negative for industrials in the rest of the world. The US energy sector (with the exception of wind energy) would also likely benefit, and Trump’s push to retain tax benefits for the wealthy would benefit consumer spending relative to a Harris win.

Neither candidate appears friendly towards Big Tech and healthcare, with both sides wary of the influence of the former and the IRA’s clampdown on prescription drug pricing set to impact the latter in either scenario.

Looking over the longer term (12 to 18 months), we would expect deficit spending to rise under either candidate. The higher inflation this would entail is typically good for equities as an asset class, and the discussion will be less about which sectors are benefiting and more about the quality of individual companies and their ability to pass on inflationary pressures.

Credit: less likely to be rattled by the election

We believe credit is the area least likely to feel a big impact from the election in either direction.

In developed markets, we see potential volatility in sectors and issuers that have been sensitive historically to changes in government regulation (e.g., healthcare). Additionally, sectors and issuers that faced trade war headwinds during the Trump presidency are likely to feel pressure again were Trump to win, though we note that many such issuers have made material shifts in their supply chains away from China (via near-shoring and friend-shoring).

We see more potential risk in emerging market (EM) credit, where Trump’s tariff policies would generally be negative for China and emerging markets, particularly Mexico, while a Harris win is more likely to maintain the status quo. Though we are cautious on Mexican corporate debt in the medium term given that uncertainty may slow some investment decisions, we believe Mexico and Mexican issuers will benefit from their strong relationship with the US in the longer term. In other parts of Latin America, issuers that export to the US may see a hit to volumes if a universal tariff is implemented, but we would not expect a big impact on these companies’ credit fundamentals.

Regardless of the election outcome and the potential for short-term fluctuations in pricing, we believe that fundamentals remain solid and any bouts of volatility would likely represent opportunities to add risk at more attractive levels.

For more insights on the impact of elections this year, visit Election Watch on pinebridge.com.