Market Implications of US Election Outcome Scenarios: UBS Insights

As the 2024 US election draws near, analysts predict its outcome could significantly impact financial markets. According to UBS Global Research, different electoral scenarios pose distinct risks and opportunities for equity markets, interest rates, and specific industries.

UBS identifies four primary election outcomes: 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 scenario in which Kamala Harris is elected president and the Democrats control both the Senate and the House could negatively influence equity markets.

The potential increase in corporate tax rates and the expiration of certain personal tax cuts from 2017 may lead to lower consumer spending and reduced business profits. Additionally, there may be heightened regulatory scrutiny, particularly regarding mergers and acquisitions, though recent Supreme Court rulings could limit such regulatory actions.

Market Implications:

• Equity Markets: A slight decline is anticipated due to higher corporate taxes and increased regulations. The financial services sector could be particularly hard-hit, while sectors like industrials, materials, and renewables may experience some upward movement.
• Interest Rates: A decrease is expected, influenced by lower inflation and potential rate cuts from the Federal Reserve.
• Sector Impact: Fossil fuel industries might face increased regulatory burdens, while renewable energy sectors may benefit. The financial sector could struggle due to heightened regulatory costs.

2. Harris with a Split Congress (35% Probability)
If Harris wins the presidency but faces a split Congress, with a Republican Senate and a Democratic House, market impacts would likely be less severe than in the Democratic sweep scenario.

Harris may need to rely on executive orders and regulatory measures, but limitations from recent Supreme Court rulings could restrict her capacity to act.

Market Implications:

• Equity Markets: Minimal expected impact. Focus would likely remain on specific companies in the renewable sector, with a neutral to negative effect on fossil fuels and financial services.
• Interest Rates: Expected to be stable, influenced by the residual effects of prior Federal Reserve policies.
• Sector Impact: The fossil fuel industry may continue to face risks from regulations, while renewable energy sectors could find some relief. Financial services might experience constraints from ongoing regulatory scrutiny.

3. Republican Sweep (40% Probability)
In the event of a "red sweep," where Donald Trump becomes president with Republicans controlling both legislative chambers, equity markets could benefit from a favorable business environment.

Maintaining or lowering corporate tax rates and reducing regulatory oversight could enhance market sentiment. However, potential higher tariffs and trade tensions may counteract some of these benefits.

Market Implications:

• Equity Markets: A generally positive outlook is expected, driven by possible increases in mergers and acquisitions and lower corporate taxes. However, concerns surrounding inflation and trade disputes could temper gains.
• Interest Rates: Likely to rise, fueled by inflationary pressures and an increase in Treasury supply.
• Sector Impact: The fossil fuel sector may gain from reduced regulations, while the technology and consumer discretionary sectors could encounter challenges due to higher tariffs.

4. Trump with a Split Congress (15% Probability)
Should Trump win but face a split Congress, market reactions would likely combine elements from the Republican sweep and the split Congress scenario under Harris.

Regulatory changes would be tempered, with significant fiscal policies facing opposition in Congress. Consequently, market impacts would be mixed, balancing the advantages of reduced regulations against challenges posed by higher tariffs.

Market Implications:

• Equity Markets: Likely to be mixed, benefitting from reduced regulations and increased M&A activity, but facing challenges from inflationary pressures and tariff concerns.
• Interest Rates: Expected to be slightly higher, with increased volatility due to geopolitical uncertainties and fluid Federal Reserve policies.
• Sector Impact: Fossil fuel and financial services sectors may benefit from reduced regulatory burdens, whereas the consumer and technology sectors could be challenged by tariff impacts.