Key takeaways:
- The U.S. election has avoided a drawn-out vote count for the presidency, eliminating uncertainty for markets amid a big win for Republicans.
- U.S. stocks rallied on the prospect of pro-growth Republican policies. History shows, though, that over the long term, equity performance has been indifferent to election outcomes.
- More important are factors such as earnings growth and interest rates, which are trending positive through the end of 2024 and should be what investors focus on, in our view.
Marc Pinto, Head of Americas Equities, and Lucas Klein, Head of EMEA and Asia Pacific Equities, say a surprisingly straightforward U.S. election could provide additional momentum to U.S. stocks through the end of 2024. But it remains to be seen how policy will impact future earnings—the real driver of long-term returns.
Investors have spent much of 2024 trying to make sense of the U.S. election and the implications for markets. Now they’re getting answers — and quickly: Donald Trump has secured a second term as president, the Senate majority has flipped to Republicans, and the race for control of the House remains tight. It’s a strong victory for Republicans and a win for equity markets as election uncertainty gets removed.
On election night, U.S. stocks were clear beneficiaries. S&P 500® futures rose as votes were being tallied, as did contracts tied to the Russell 2000 Index, the benchmark of small-cap U.S. companies. The positive momentum spread globally, with select ex U.S. markets also rising as the election outcome crystalized.
Trump is viewed as supporting lower corporate tax rates, deregulation, and industrial policies that favor domestic growth, all of which could provide more stimulus to the U.S. economy and benefit risk assets. These policies could also lead to a stronger dollar, which would be a boon for U.S. small-cap firms with a domestic focus. During the 2016 election, the S&P 500 Index gained nearly 5% from the day before the presidential election through the end of the year in what became known as the Trump rally.1 We expect a similar trend could play out this time around, too.
Longer term, though, history shows equity markets are more likely to be indifferent to whichever party is in power. A Republican-led White House and Congress has been just as likely to see positive equity returns as a Democrat-led or divided government (Figure 1). That’s because over the long term, what tends to matter most for stock returns are not elections but factors such as corporate earnings, economic growth, and interest rates.
The good news on that front: All have been trending positively in the U.S. In the third quarter, the U.S. economy grew at an annual rate of 2.8%, continuing a more-than two-year run of expansion.2 In September, the Federal Reserve kicked off a rate-cutting cycle that could continue into next year should inflation remain contained. And earnings for the S&P 500 are projected to rise ~15% in 2025, up from an estimated 9% for 2024.3
That’s not to say the election is inconsequential. We will get the first measure of the new government early next year, when lawmakers must agree to raise the debt limit (the total amount of debt the U.S. is allowed to accrue, as determined by Congress) or risk the country defaulting on its obligations. Meanwhile, the 2017 Tax Cuts and Jobs Act — which was signed into law under Trump and reduced tax rates for individuals and corporations — is set to expire by the end of 2025.
To that end, we could see bouts of volatility if a Republican mandate results in extreme measures. Trump, for example, has proposed not only extending the 2017 tax cuts but adding to them, which could exacerbate an already ballooning federal deficit. He has also promised to impose tariffs of as much as 60% on imports, which could work to fan inflation and lift Treasury yields. And markets that could be on the losing end of trade policies, such as China, could weaken.
We think the reality will be nuanced. For example, while fears exist about the impact of tariffs on non-U.S. markets, in aggregate, we believe they are overblown as they relate to Europe. We also think a strong dollar is generally quite positive for European and Japanese exporters. We covered other potential implications earlier this year, highlighting that areas such as financials might get less stringent regulatory oversight under Republican leadership and that a Trump administration could walk back tax credits for wind, solar, and electric vehicles.
Still, policy doesn’t always match campaign rhetoric, and even among Republicans, there are divisions on key issues. As such, we’d encourage investors to stay focused on bigger themes that have proven to be major drivers of markets lately. These include innovation in healthcare, productivity growth from artificial intelligence, and the rise of new manufacturing hubs in emerging markets. Ultimately, these and other trends, which look set to play out for years to come, could have more influence over which stocks outperform over the long term than any one election.
IMPORTANT INFORMATION
Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.
Ex U.S. securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Financials industries can be significantly affected by extensive government regulation, subject to relatively rapid change due to increasingly blurred distinctions between service segments, and significantly affected by availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition.
Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.
Industrial industries can be significantly affected by general economic trends, changes in consumer sentiment, commodity prices, government regulation, import controls, and worldwide competition, and can be subject to liability for environmental damage and safety.
Smaller capitalization securities may be less stable and more susceptible to adverse developments, and may be more volatile and less liquid than larger capitalization securities.
Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance does not predict future returns.
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