US election: what a Trump or Harris win means for share prices

A tight race for the White House and control of Congress is increasingly having an impact on Wall Street as jitters set in after this year’s AI-fuelled boost for US equities.

Donald Trump is seen as the marginal favourite to win the presidential election, while the probability of a Republican clean sweep is now up to nearly 50%.

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The prospect of deregulation and tax cuts has underpinned the re-emergence of the Trump trade, although some of these bets have since unwound due to worries his re-election will strengthen the dollar and dent the interest rate outlook.

In addition, analysts have warned over the longer-term impact if tariff and trade war concerns result in volatility for a number of sectors.

Should Kamala Harris prevail, there’s likely to be less of an impact for US equities due to the continuation of existing economic policies. In addition, stock markets outside the US could experience a relief rally due to the avoidance of Trump tariffs.

Polls close on Tuesday, but there’s the possibility that the outcome is not known for several weeks due to the potential for recounts and legal contests.

The presidential result is likely to hinge on swing states such as Michigan and Wisconsin, where Harris appears to have gained ground, and in Pennsylvania. Since 1960, UBS notes that six different elections have been decided by fewer than 150,000 votes in just a few states.

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The prospect of a tight outcome is reflected in the S&P 500 index over the past fortnight, with the leading benchmark also down by more than 1% at today’s opening bell.

Investors are increasingly fearful that interest rates are staying higher for longer, with the next decision by the Federal Reserve due two days after the US election closes.

Despite the higher probability of a Trump win and a Republican sweep, Capital Economics believes there’s the scope for a sizable move in markets in the days after the election.

The consultancy said this week: “Our assessment is that the immediate response to a Trump win would be higher US yields, a stronger dollar and, probably, a rise in the US equity market (and outperformance of US equities vis-à-vis those in the rest of the world).

“Whereas a Harris win probably results in somewhat lower Treasury yields, a weaker dollar, and a slightly softer equity market. An unclear or contested outcome could result in a period of risk-off moves until that uncertainty was resolved.”

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Once the dust settles, it’s likely that fundamentals will return to drive market direction. Since the end of the third quarter of 2022, US large-cap markets have outperformed globally, with the S&P 500 up 67% and the Nasdaq Composite ahead 76%.

These strong returns reflect a supportive backdrop of durable economic and corporate profit growth, falling global inflation, a boom in artificial intelligence and the start of stimulus in China.

UBS said: “Despite the volatile and often heated rhetoric of the US election campaign, it is unlikely that the election outcome will derail the drivers that have propelled global stocks higher over the past two years.

“Even in the context of election uncertainty, we continue to view global equities as attractive. Still, the election could create short-term volatility, and investors can consider hedges to insulate portfolios.”

Deutsche Bank added: “For US equities the future of AI, and whether it delivers on the hype, will probably be the most important factor for performance in the next four years rather than who is president.”

The signs are positive, given how the S&P 500 performed after the past four presidential elections gave investors clarity on policy. Charles Schwab noted this week that the index rose by 26.9% in the year after Joe Biden’s 2020 election and by 19.4% after Trump’s 2016 victory.

Barack Obama saw 23.5% and 29.6% growth after his successes in 2008 and 2012, boosting the Democratic Party’s overall average since 1928 to 12.9% compared with -0.8% for Republicans.