US election results to set tone for equity markets

The latest edition of ClearBridge Investments’ monthly Anatomy of Recession report has highlighted several ‘investment implications’ as a result of the United States presidential election outcome.

Jeffrey Schulze, Director and Head of Economic and Market Strategy for the global investment manager, said the areas of taxes, regulation, trade and fiscal spending are set to be the most impacted dependent on the election results.

Considering the current predictions, Schulze said the two most likely outcomes are either a Republican sweep or a Harris presidency with a divided government, which would have quite diverse effects on the US and global economies.

“We view a Trump win, likely coming in a sweep scenario, as net positive for equities as it preserves favourable corporate tax treatment and builds on tax elements that expired.

“A Harris win, likely coming with a divided Congress, would be mildly negative due to fewer provisions of expiring tax legislation getting extended due to political gridlock.

“A Republican sweep would be the most market friendly outcome from a tax perspective, building on some of the elements that expired, including individual provisions and full expensing of R&D, which would benefit capex-heavy areas of the market like technology, industrials and manufacturing.”

In the report, Schulze also signalled for investors to not read too deeply into the outlooks on changes to regulation due to election outcomes, as they typically do not occur as expected.

“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.”

If Trump were to emerge victorious from the election, Schulze expects U.S. stocks, particularly banks, capital markets, oil and gas, to be best positioned to succeed. With Harris at the helm, the economy may see a boost to low-income individuals as corporations and higher-income earners would be hit with more appropriate tax bills.

“Aerospace and defence is also likely going to benefit [from a Trump administration] as well as biopharmaceuticals. Areas that could see pressure are restaurants and leisure, due to the less availability of labour, as well as EVs, autos and clean energy producers.

“From a regional standpoint, China would be hurt by tariffs while other import-driven nations like Vietnam, Mexico, India and Italy would stand to benefit.

“It will be more of a headwind to the markets should we see a Democratic sweep as [Harris] 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. But again, we caution against basing investment or portfolio positioning solely on the regulatory environment.

“Areas to be bullish about under Harris would be consumer discretionary, specifically restaurants and leisure, home building and building products.”