Market implications of US election outcome scenarios: UBS

As the 2024 US election approaches, its outcome will likely have profound implications for financial markets. As per analysts at UBS Global Research, different election scenarios present varying risks and opportunities for equity markets, interest rates, and specific sectors.

The note flags the potential market impacts based on the four primary election outcome scenarios identified by UBS, namely: a Democratic sweep, a split Congress with a Democratic president, a Republican sweep, and a split Congress with a Republican president.

1. Democratic sweep (10% probability)

A “blue sweep,” where Kamala Harris wins the presidency and the Democratic Party controls both the Senate and the House, is expected to be the most negative for equity markets.

The potential for higher corporate tax rates and the expiration of some 2017 personal tax cuts could exert downward pressure on consumer spending and business profits.

Regulatory scrutiny may increase, particularly concerning mergers and acquisitions (M&A), although recent Supreme Court rulings may limit the extent of regulatory actions.

Market implications:

Equity markets: Likely to experience a slight decline due to higher corporate tax rates and increased regulatory oversight. The financial services sector may be particularly affected negatively, while industrials, materials, and renewables could see some positive movement.

Interest rates: Expected to decline, driven by lower inflation and the Fed’s potential rate cuts.

Sector impact: Fossil fuel energy sectors may suffer from increased regulations, while renewable energy industries might benefit. The financial sector could face significant challenges due to increased regulatory costs.

2. Harris with a split congress (35% probability)

In a scenario where Harris wins the presidency but faces a split Congress—with a Republican-controlled Senate and a Democratic House—the impact on markets would likely be more muted compared to a blue sweep.

Harris would need to rely heavily on executive actions and regulatory measures, but recent Supreme Court decisions could limit the scope of these actions.

Market implications:

Equity markets: Minimal impact anticipated. The focus would remain on selective companies within renewables and energy efficiency, with a neutral to negative effect on fossil fuels and financial services.

Interest rates: Likely to remain stable, influenced by the lagged effects of previous Fed policies.

Sector impact: The fossil fuel industry might continue to face regulatory risks, while renewable energy sectors may see some relief. Financial services could remain constrained by ongoing regulatory oversight.

3. Republican sweep (40% probability)

A “red sweep,” where Donald Trump wins the presidency and the Republicans control both the Senate and the House, would likely lead to a more favorable environment for equity markets.

The extension or reduction of corporate tax rates and diminished regulatory oversight are expected to boost market sentiment, although higher tariffs and increased trade tensions could present headwinds.

Market implications:

Equity markets: Generally positive, with potential for increased M&A activity and lower corporate taxes. However, concerns about inflation and trade tensions could partially offset gains.

Interest rates: Likely to rise, driven by inflationary pressures and increased Treasury supply.

Sector impact: The fossil fuel energy sector could benefit from reduced regulations, while the technology and consumer discretionary sectors might face challenges due to higher tariffs.

4. Trump with a split congress (15% probability)

If Trump wins the presidency but faces a split Congress, the market implications would be a blend of the red sweep and Harris with a split Congress scenario.

Regulatory changes would be less pronounced, with significant fiscal policy changes likely blocked by Congress. The impact on markets would thus be mixed, balancing between reduced regulatory risks and higher tariffs.

Market implications:

Equity markets: Mixed, with benefits from reduced regulation and M&A activity, but challenges from higher tariffs and inflationary pressures.

Interest rates: Slightly higher, with increased volatility due to geopolitical risks and Fed policy uncertainties.

Sector impact: Fossil fuel and financial services sectors might benefit from decreased regulatory burdens. The consumer and technology sectors could face challenges from tariff-related impacts.