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Stock markets will likely become more volatile in the months ahead of the US election, UBS said.
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How they react after November will also depend on which party controls Congress.
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A Republican takeover would be the most positive for markets, though Trump’s trade policy is a headwind.
With President Joe Biden once again facing off against Donald Trump for control of the White House, market volatility is bound to pick up in the months ahead of November’s election, UBS said.
“There are significant market implications arising from the stark contrast in the policies promulgated by the two candidates for president,” the bank wrote in a research report published Tuesday. “While we are obliged to remind investors that portfolio construction is best treated as an apolitical exercise, the next eight months are likely to be exceptionally distracting.”
But how equities react won’t only depend on the winning candidate, but also on whether their party takes hold of Congress. However ambitious their platforms may be, neither Biden nor Trump can implement their agendas to the fullest without congressional backing.
Here are how four electoral outcomes could sway stock markets, according to UBS:
1. Blue Sweep
A complete democratic takeover is likely bad news for equities, as it means higher chances of a corporate tax hike, the bank forecast.
Under the Biden administration’s recently released 2025 budget proposal, the corporate tax rate is set to rise to 28%, alongside proposals for a minimum income tax on billionaires.
“The expiration of some 2017 personal tax cuts could also be a small drag on consumer spending,” UBS added, referring to a tax overhaul enacted under Trump. “Regulatory pressures could increase in some industries, but this would generally be more of an extension of the status quo.”
2. Biden wins, Congress splits
As this scenario best resembles today’s legislative setup, UBS sees a muted impact on markets. Meanwhile, Biden’s proposed changes would have a tougher time surviving Congress, forcing him to rely more heavily on executive orders and regulatory oversight.
3. Red Sweep
Under a Republican-led government, the 2017 tax cuts would likely be extended, and could possibly come with deeper reductions to the corporate tax rate. To fund this, green energy provisions under Biden’s Inflation Reduction Act could be slashed.
While a pullback in taxes and regulation would boost equities, Trump’s trade policies could bear down on even higher market gains. The former president has touted plans to implement a universal 10% tariff on all imports should he take office, with a 60% tariff on Chinese shipments.
This implies a rebound in inflation, as well as a tighter interest rate regime, discouraging investors.
4. Trump wins, Congress splits
With Republicans likely unable to successfully pursue tax and fiscal changes through Congress, financial markets would enjoy less tailwinds, though regulation would still be looser than under Biden.
Trump should still be free to apply tariffs, even without Congressional support, prompting similar risks as in the last scenario, UBS said.
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