The winner of the U.S. presidential election will have a dramatic impact on various issues important to institutional investors. Here's the market outlook with a Donald Trump victory:
Trump wins
Saira Malik, head of equities and fixed income and chief investment officer at Nuveen, said markets have been pricing in a greater-than-even probability of a Donald Trump victory over Kamala Harris. A Trump victory, she said, could provide some degree of easing in the relatively high levels of volatility. Nevertheless, she cautioned that market volatility will not entirely subside, given certain expected policy changes by the new Trump administration, military conflicts around the world, and other lingering issues.
Under a second Trump administration, she expects to see a strong push to extend several of the key provisions of his former administration’s 2017 Tax Cuts and Jobs Act bill.
“Trump will push to extend, and possibly lower, the current marginal tax rate levels for high-income earners,” Malik stated. “We also expect a potential effort to reduce clean energy tax credits and scale back IRS enforcement.”
A Republican White House, she added, may also push to reduce corporate tax rates from the current 21% rate (which were themselves reduced from 35% in 2017 by Trump).
“The wildcard when it comes to tax policy is tariffs,” she cautioned. “Should they come to pass, the net result would be to boost domestic production and economic growth, at least in the short run, but also would likely spark higher inflation levels that would put upward pressure on bond yields and may slow the pace of Federal Reserve rate cuts.” Nuveen has $1.3 trillion in assets under management.
Trump has proposed 60% tariffs on all goods from China and 10% on all other imports. Trump’s tariff proposal was described as a “blunt instrument intended to raise revenues and protect some domestic industries,” said Thomas Kuh, head of ESG strategy at Morningstar Indexes.
Joseph V. Amato, president and chief investment officer-equities at Neuberger Berman, said “National security (concerns) gives the president some scope to impose tariffs without approval from Congress, as Trump did on aluminum and steel in 2018, but it also seems likely that Trump’s more aggressive trade proposals are conceived as a starting point for negotiation.” Neuberger Berman has about $509 billion in AUM.
A second Trump administration may also act as a headwind for green energy sectors, Malik said. “But even with Trump’s victory, we do not expect a wholesale end to (Joseph Biden’s Inflation Reduction Act of 2022) provisions,” she said. “It would be difficult to pass a repeal in both houses, and general corporate and consumer support exists for decarbonization. Perhaps more importantly, Americans are generally happy with the (Inflation Reduction Act), as infrastructure money is being broadly distributed.”
Andrzej Skiba, managing director and head of U.S. fixed income, RBC Global Asset Management, said bond markets could be negatively impacted by Trump’s trade policies.
“We think a Trump win will be really bad for fixed income and can unwind a lot of the bullishness in fixed income,” Skiba said. “Trump keeps openly telling people that he will increase tariffs not just on China but with every trade partner. We’re talking 10% tariffs across all global partners. This is a big deal because this could add 1% to inflation. If you add 1% to next year’s inflation numbers, we should say bye to rate cuts. With higher tariffs, the Fed will not be in a position to cut rates even if the economy is slowing down, and that is a toxic mix for fixed income.”
One percent doesn’t sound like a lot, Skiba added, but from a Fed perspective, it could make all the difference between being able to cut rates or not. RBC Global Asset has about $575 billion in AUM.
Anthony Kettle, BlueBay senior portfolio manager at RBC Global Asset Management, stricter regulations and tariffs primarily aimed at China by a victorious Trump would also likely result in a strong US dollar, negatively impacting the Chinese currency,
“Harsher tariffs on China could positively impact U.S. manufacturing but will raise the cost of goods sold domestically,” he added. “Mexico, an emerging economy, may have the most to gain from harsher tariffs on China. Expect the U.S. to trade more closely with Mexico in place of China, particularly given the existence of the North America Free Trade Agreement, which is aimed at fostering trade relations between Mexico, U.S. and Canada. This will bring an increase to Mexican production and positively impact Mexican industry.”
A Trump victory could spell trouble for emerging private credit, said Mihai Florian, BlueBay senior portfolio manager within the RBC GAM emerging markets team, due to the tariff increases that Trump has proposed and a desire by Republicans to produce and retain from within. “We expect volatility in emerging market credit if Trump is elected,” Florian said.
On the other hand, a Trump administration would likely ease the regulatory environment and benefit the finance, energy, and health care sectors, Malik indicated. “Unified Republican control of the White House and both chambers of Congress could also support higher defense spending and increased investment in traditional oil and gas exploration, which would serve as a relative benefit to those sectors,” she added.
Kettle also thinks Trump will crack down on immigration, “which could lead to more job vacancies in America and increase the cost of labor, further challenging the disinflation narrative.”
For investors, Amato noted, a Trump victory might benefit small cap stocks, midcaps and sectors that are more sensitive to regulation, such as energy, power, industrials and financials.
Overall, said Matt Orton, head of advisory solutions and market strategy and chief market strategist at Raymond James Investment Management, a Trump victory is likely to be perceived as pro-growth, but more inflationary due to his campaigning on more significant tax breaks and fiscal spending. Raymond James Investment has $102.7 billion in AUM.
If Harris won
A victory by Harris would have largely represented a continuation of the status quo under Joseph Biden, Malik of Nuveen said, meaning “we are unlikely to see notable changes” in policy.
“Her victory almost certainly means that the IRA will remain intact, and possibly extended,” Malik said. “Harris would push further climate-related initiatives, which would benefit investments such as battery and solar manufacturing in addition to clean infrastructure.” However, Malik cautioned, it will be exceedingly hard to get those measures passed through a Republican-controlled Senate.
“From a broader perspective, we believe the global momentum behind the shift to cleaner energy is unlikely to change,” Malik assured. However, shifting to renewable energy requires significant up-front costs' more traditional energy sources won’t be disappearing any time soon, she added, pointing to continued support for investments related to natural gas and nuclear power.
With respect to corporate taxes, Harris seek to raise this rate to 28% from 21% (while Trump has proposed lowering it to 15%, at least for companies that manufacture their products in the U.S.) “A cut or a hike of these proportions would be a big deal,” Amato of Neuberger said. “A one-percentage-point change in the corporate tax rate could add or subtract just under 1% of S&P 500 Index earnings.”
On tariffs, said Kuh of Morningstar, Harris would likely continue Biden’s use of tariffs as part of a targeted industrial policy to foster emerging technologies and domestic production critical to the climate transition.
In trade and regulation. Harris likely will retain much of the Biden administration’s approach, which has been specifically targeted against China’s growing dominance of global supply chains, Amato said. “Allies of the U.S. tend to get a lighter touch, but there are modest barriers around specific technologies and sectors,” he added.
The pending 2025 expiration of most provisions of the 2017 Tax Cuts and Jobs Act under President Harris will look far different than it would have under Trump.
“Even though the TCJA originally passed under a Republican-unified government, there are some provisions that Democrats would likely plan to keep, especially those that lowered marginal tax rates for middle-class Americans,” Malik explained. “More specifically, Democrats will likely push to increase taxes on those with incomes above $400,000 and lower rates for other taxpayers. We could also see a push to increase net investment income tax to include passive income, as well as a desire to tax long-term capital gains and qualified dividends as ordinary income.”
On balance, tax rates would rise for at least some Americans, which could increase the importance of tax-loss harvesting strategies, and warrant an increased focus on investment areas such as municipal bonds and real estate investments, Malik said.
With a Harris victory, bond investors should expect “more continuity” as the Fed continues to cut rates into a slowing economy, said Skiba of RBC.
“In that environment, money continues to move further out the curve in anticipation of those cuts,” he added. “If Harris wins, it will be very constructive for the (fixed income) asset class not just because of visibility of the monetary and fiscal policy, but also because you are likely to receive the benefit from money markets moving into other areas of fixed income. With money markets close to multi-year highs, there is a lot of money that investors can put to work.”
Gridlock 'gold' for investors
Investors prefer when politics have as little impact as possible on their portfolios.
“Therefore, gridlock can be markets’ best friend,” Malik said. “With government somewhat divided, the scope of any new legislation is likely to be narrower in scope than it would otherwise. Under a unified government, regardless of party, deficits tend to widen more substantially than they do when government is divided as it becomes easier to pass sweeping tax reduction or new spending.”
That was the case with Tax Cuts and Jobs Act in 2017, which occurred under a Republican president and a GOP-controlled congress, and the Inflation Reduction Act in 2022 (under a Democratic president and a deadlocked congress with Vice President Harris breaking the tie).
Sylvia Jablonski, CEO and CIO of Defiance ETFs, does not think the election will make that much difference on the markets.
"I don’t really believe in the 'election trade’,” she said. “Historically, the market continues to chug along at the path it's already on.” She concurred that unless the White House and both houses of Congress come under control of one party, little will change.
“There might be market impacts a few years after the election as policies change, but I don’t really trade for the election,” she added.
For now, Jablonski thinks markets are most concentrated on third quarter earnings, the path of inflation, as well as geopolitics. Defiance has about $2 billion in AUM.
Gridlock is “gold” for markets, said David Bahnsen, chief investment officer at the $6 billion Bahnsen Group. “The market likes a divided government, and does not want any one party to have too much power or too much ability to enact legislation that could affect the business cycle,” he said.
Whoever occupies the White House, Amato does not see a high probability of either candidate’s more extreme proposals becoming law.
“We think it is likely we’ll see divided government, with the Democrats retaining the House of Representatives and the Republicans taking the Senate,” he said. “As a result, Congress is likely to apply its reins to whoever wins the presidency.”
Outlook for ESG
For ESG investors, renewable energy, diversity in workforce, and governance issues, the candidates present two diametrically opposed viewpoints.
A Harris administration would favor interests of ESG investors whereas a Trump administration would be antagonistic, said Kuh of Morningstar.
With respect to climate mitigation and adaptation, financing the transition to a low-carbon economy will be a high priority for ESG investors. “Harris would likely continue or enhance the ‘green economy’ policies in the Inflation Reduction Act,: he said. “Trump’s commitment to unleash fossil fuel interests and undo support for green technologies would set back U.S. efforts to reduce its carbon footprint.”
That said, rolling back some of the progress already in the market, like the cost-competitiveness of wind and solar power, would be difficult.
A Harris administration would support proposed SEC climate disclosure rules for corporations, which are currently being challenged in the courts. In contrast, Trump would roll back such rules. “Trump would also continue to undermine the ability of federal agencies to regulate, whereas Harris would try to reverse that trend,” Kuh added. “This has implications for regulatory rulemaking and enforcement on air quality, clean water and greenhouse gas emissions reduction; worker safety; food safety, etc.”
Little difference on debt and deficit
With respect to debt and deficits, Amato of Neuberger said neither candidate appears willing to address this issue.
“There seems to be little appetite to cut defense or entitlements spending, two of the three biggest elements of the federal budget, interest expense being the other.,” he said. “Economists’ projections show only a modest difference in the deficit under each candidate over the next five years. Broadly speaking, Harris’s proposals show a deficit-neutral redistribution from corporate and higher-income taxpayers to lower-income taxpayers; Trump’s show a slight deficit reduction, assuming tariff revenues offset lower taxes. Again, divided government is expected to soften the effect of either president’s proposals; and, in both cases, slightly improve the debt outlook."
