investment insights
US election scenarios and investment implications
Key takeaways
- The US presidential race looks too close to call. We would expect a Democratic win to result in a divided Congress, and a Republican one to result in a united Congress
- The latter would mean higher inflation and slightly higher nominal growth, forcing the Federal Reserve (Fed) to halt its interest rate cutting cycle at around 4%; a Democratic presidency would imply greater policy continuity and the Fed cutting rates through mid-2025
- Bond yields would likely rise in a Republican administration, as would the US dollar against the euro. We would expect equities to gain ground, particularly banks and defence stocks
- In our view, a Democratic win would have a more neutral impact on equities and the dollar. Defensive stocks would become more appealing, and 10-year Treasury yields would fall into a 3.6-4.1% range.
We review the race for the White House, different scenario probabilities and their economic and asset class implications.
How would we judge the impact of a Kamala Harris presidency? Or of a Trump win with Republicans seizing control of both houses of Congress? As Ms Harris mobilises Democratic support, the US presidential race is tightening and now looks too close to call. Polling models currently suggest both Ms Harris and Mr Trump have approximately equal chances of being elected, with Ms Harris showing some momentum. We ascribe a 50% probability to a win for either candidate. At the legislative level, we think the odds favour a divided Congress in the event of a Democratic win, and a united one in the event of a Republican win.
Assessing scenarios for the House and Senate
The seat arithmetic in the Senate looks favourable for the Republicans. If Mr Trump takes the White House, his party needs just one additional Senate seat to take a majority. If Ms Harris were to win, the Republicans would need only two additional seats (since the Vice President would otherwise give the Democrats a Senate majority of one). As Democrats need to defend seats in three traditionally Republican-leaning states – Ohio, Montana, and West Virginia – we assign a high probability to a Republican Senate.
In contrast, the race for the House looks evenly split, although here much depends on the momentum created by the Harris campaign. In the event of her winning the presidency, it could be enough to win swing states and give her party a majority in the lower chamber. In summary, in the event of a Trump win, we judge the odds to narrowly favour a united Republican Congress, while a Harris win would likely see a divided House and Senate.
What do our election scenarios imply for the US economy? Both presidential candidates share some key policy similarities: a tough stance on China, little appetite to reduce the federal deficit, and an impulse to favour US corporate interests. In a second Trump term, we would expect the impact of new tariffs to be a key economic variable, in addition to extending tax cuts and tightening immigration. In foreign policy, a Trump presidency could shift dynamics in the Middle East and question American support for the war in Ukraine.
Macroeconomic impacts of Republican and Democratic administrations
Across our modelled Republican and Democratic scenarios, we see 2025 US real GDP growth falling within a 1.9-2.2% range. In the event of a Republican ‘clean sweep’ – securing the presidency, House and Senate – pro-growth policies on regulation, energy and extending tax cuts could see higher nominal growth and inflation, forcing the Fed to halt its interest rate cutting cycle at around 4% in the second quarter of 2025.
In the event of a Trump presidency with a divided Congress, the impact of tariffs would likely dominate, slowing growth while still increasing inflation. This would also force the Fed to stop cutting rates, but at a lower level given more fragile growth and labour markets.
A Harris administration would imply a situation of greater policy continuity. In this case, the Fed could continue cutting rates at each successive meeting through mid-2025 to keep unemployment contained as inflation falls. Here we would see a divided Congress as the overwhelmingly likely scenario. If a Democratic clean sweep were to happen, we would probably see a slight shift to the left, with more focus on income inequality and redistribution, and continuity on energy, labour, immigration and foreign policies. Below we focus primarily on the asset class implications of the three most likely scenarios: a Republican clean sweep, a Trump win with a divided Congress and a Harris win with a divided Congress.
Republican cross asset implications
We would see a Republican clean sweep scenario of higher growth and inflation as the most positive outcome for equities, with the S&P 500 moving closer to 6,000 by year-end. A majority in both House and Senate has historically been most positive for the asset class. In this case, we would expect banks and the defence sector to outperform, the former on less stringent regulation, stronger growth and higher interest rates, and the latter as defence spending becomes a growing theme. Gains for the energy sector would likely be limited – on the back of rising US oil production exerting downward pressure on prices – while volatility could rise in tariff-sensitive sectors including clean energy, electric vehicles, and semiconductors.
Assuming comparatively higher growth and inflation in 2025, less room for rate cuts and a widening of the fiscal deficit, we would expect bond yields to climb. This would likely be led by a rise in long-dated paper, bringing US 10-year yields into a 4.2-4.7% range. Returns on US Treasuries would likely underperform those on short-term money market instruments. In credit, we would expect high yield bonds to outperform investment grade names and would favour debt from cyclical companies and shorter-dated bonds.
We would also judge a Republican clean sweep to be the most positive scenario for the US dollar, with EURUSD trading in a 1.01-1.06 range. Tariffs would imply more negative implications for Asian currencies, notably the Chinese yuan, while a generally more volatile market environment and lower oil prices could also prove detrimental for many higher-yielding emerging market currencies. We note that the dollar could also see some short-term pullbacks due to lower energy prices, or Mr Trump’s own verbal interventions to drive it lower, particularly against the yuan and the Japanese yen.
A Trump win with a divided Congress would be more moderately positive for equities in our view, with less clear-cut sector trends and cyclical sectors continuing to outperform. Bond price movements could be more limited, and we would expect US 10-year yields to trade in a 3.8-4.3% range, given modestly lower growth accompanied by higher inflation. Within credit, we would still expect high yield to outperform investment grade names. In currencies, the implications would still be dollar-positive, but less pronounced, with EURUSD in a 1.04-1.09 range and less broad-based strength against other currencies, with low-yielding ones such as the Swiss franc and the Japanese yen performing slightly better.
Democratic scenarios
Under a Democratic win with a divided Congress, we would still assume a soft landing for the US economy, but with a modestly positive equity impact. We would see the S&P 500 ending the year in a 5,300-5,700 range. We would expect continued pressure on the healthcare sector amid ongoing efforts by a Democratic administration to reduce healthcare costs. US “exceptionalism” should fade as growth normalises nearer trend levels – which we judge to be around 2% - and the risk of additional tariffs recedes.
Ongoing disinflation would likely see US 10-year yields fall into a 3.6-4.1% range. A faster decline in developed market interest rates, including the Fed funds rate, would be a less favourable dollar scenario, and should support lower-yielding currencies including the Swiss franc and Japanese yen in late 2024 and early 2025. Asian currencies should perform better as additional tariff risks recede, although we would expect ongoing weakness for the yuan and the dollar remaining broadly stable against the Chinese currency. We would still expect the dollar to enjoy benefits from its higher-yielding status against the euro but would expect EURUSD to be higher than in the event of a Trump victory, likely in a 1.08-1.13 range.
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