Macro views

2024 US presidential election insights from Mirova

October 22, 2024 - 5 min read

Major policy differences between the two presidential candidates

As with the 2016 and 2020 elections, voters are presented with divergent policy platforms. The key policy differences, and those we expect to have broad capital market implications, are on trade and tax policies, which have been a focus of the two campaigns.

With Trump, higher tariffs are almost certain, an extension of reduced individual tax rates is also likely (Tax Cuts and Jobs Act), and lower corporate tax rates are possible. With Harris, tariff policy is likely to be far more selective, while both corporate and capital gains tax rates could rise, and personal income tax cuts would likely focus on the middle class. The candidates differ in other areas, notably on climate and energy (including the Inflation Reduction Act (IRA) and environmental regulation), North Atlantic Treaty Organization (NATO), immigration, and social care.

However, entrenched divisions between the two parties make bipartisan cooperation look increasingly unlikely. Thus, major policy changes will only be possible if one of the two parties manages to win the White House as well as both chambers of Congress.

We believe overall that Trump winning the presidency with a Republican sweep would likely initially be a slight positive for US equities (tax cuts) and a clear negative for non-US stocks selling into the US and US importers. Small domestics would outperform in our view. Cyclicals would likely struggle, given the pressures on global trade due to a Trump trade war. Trump with a divided Congress is, we believe, neutral for US equity markets and negative for non-US, as tariffs end up being the key policy agenda.

In contrast, we believe that a Harris victory with a democratic sweep would be initially a slight negative for US equities (tax risk). Large market cap stocks and cyclicals would outperform. Trump’s Trade War losers (non-US stocks/ importers), which have thus far not reacted to Harris’ improved polling, would see a relief rally while US corporate taxpayers would underperform further. Harris winning with a divided Congress, however, is likely to be broadly neutral for most assets.

A Harris victory would also favor certain sectors such as renewable energy and we’d expect an initial negative reaction in traditional energy (fossil fuels) stocks, bearish dollar stocks, consumer stocks benefiting from the child tax credit and measures supporting consumption by working- and middle-class households and would be negative in relative terms for banks (more regulation) and stocks with high share buybacks or low taxes. The opposite would be true in the event of a Trump victory.

In terms of interest rates, if one of the parties wins a majority in both houses of Congress, this will leave the new President and his or her administration with plenty of room for maneuver when it comes to new fiscal stimulus, the priorities of which will differ depending on whether the Democrats or the Republicans have a majority. Their spending could boost inflation and convince the Fed to maintain its conservative stance. We would expect higher inflation and deficits to push the fair value of US yields upward. We think, however, a republican sweep would be the most impactful.

Conversely, if Congress remains divided, the possible tax cuts sought by the Republicans, or the social spending planned by the Democrats, will be much more limited or even blocked. This could encourage the Fed to cut rates again.

Investment opportunities and risks under each possible administration

A Trump administration would have a widely unfavourable impact on:

European export companies, especially German OEMs would be hit in our view;
European governments: we have calculated that European states that are part of NATO would have to dedicate a combined €75bn p.a. in defense budget at the very least; this could prompt austerity measures to fund the above-mentioned budgets, and end up increasing the possibility of recession for the euro zone.²

A Trump administration could have more supportive impact on any companies exposed to the US discretionary consumption levels.

Opportunities: Small Cap US, ex Auto OEMs
Risks: inflation resurfacing, albeit capped; German OEMs suffering further.

A Harris administration would have more favourable impact on European corporates but will however likely translate into more tense relationships with Russia, in turn adding weigh on consumer confidence in Europe. We also consider that higher corporate tax rates for US companies, as is planned in the Democrats’ platform, will not be a game changer per se, and that equity markets will likely rapidly factor it into their prices.

Opportunities: US corporates; some European value corporates.
Risks: geopolitical tensions being exacerbated

Market risks leading up to and following election day

It is common for economic policy and investor uncertainty to rise as an election approaches. This time, the uncertainty could last beyond that. If the election result is close in one or more states, we may expect there to be challenges and appeals. In 2020, Donald Trump did not concede defeat and accusations of fraud are commonplace in his speeches. Uncertainty affects economic behaviour. In Q3 2024, in its CFO survey, the Atlanta Fed found that a third of the companies surveyed said they were reducing or postponing their investment plans because of this election uncertainty. Depending on the outcome, companies will not face the same taxes and trade uncertainty could re-emerge stronger than before. In a very tight presidential race, uncertainty in down ballot races, and the possibility of allegations of fraud, investor uncertainty will remain high going into the election, possibly causing increased market volatility leading up to and following the election.

In any scenario, we expect the market to experience volatility. As long-term, active investors, we may take the opportunity and leverage short-term divergences in price and long-term value.

Key strategy themes expected to play out over the next 1-3 years regardless of the election outcome

Regardless of the outcome of the election, there are a few key long-term themes we expect to remain in focus and continue to develop over the medium term. For one, we continue to see increasing demand for generative AI applications and automation, and, alongside this, increasing energy demand and need for improved energy infrastructure. We believe renewable energy and storage will have to play a role in meeting the expected energy needs in the future. We also continue to focus on the long-term opportunity in GLP-1s³ and other healthcare innovations in some of the leading causes of death, including oncology, cardiovascular disease and neurological diseases. Lastly, we expect certain areas of environmental regulation to continue to develop; specifically, we expect a continued focus by regulators on forever chemicals or Per- and Polyfluoroalkyl Substances (PFAS) in our water supply, which will create opportunities for companies involved in water quality and safety.

¹ Data resulting from analyses by Mirova.

² Data resulting from analyses by Mirova.

³ A class of medications that mainly help manage blood sugar (glucose) levels in people with Type 2 diabetes.

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