Trump Elected US President, Poised for Republican Sweep

Election Summary

Donald Trump has been elected as the 47th president of the United States, with the latest results indicating that he has exceeded the 270 Electoral College vote threshold, according to the Associated Press as of 5:40 a.m. EST. In congressional elections, the Republican party has regained control of the Senate and is poised to keep a majority in the House of Representatives.

Trump had secured 277 electoral votes needed to win the presidency by 5:40 a.m. EST on November 6, with key victories in battleground states such as Georgia, Pennsylvania and Wisconsin. In the Senate race, the Republicans had won 51 of 100 seats, with seven races yet to be called. The Republicans were also on track to retain control in the House of Representatives, winning 197 seats, with 218 needed for a majority. The apparent Republican sweep of the presidency and Congress follows exceptionally intense political campaigning, driven by rising political polarization. Both the Republican and Democratic respective policy platforms have offered very different prescriptions to address widening wealth and income inequality in the US over recent decades. With the Trump-led Republicans consolidating control, significant policy changes are likely to be put into action in the months ahead.

In the near term, financial markets could be volatile as investors adjust to the new political constellation in Washington D.C. However, we caution investors against making tactical changes to portfolios and allocations in response to the election results. Post-election volatility is quite common; when Trump was elected to his first term in 2016, immediate volatility in financial markets faded quickly. Policy changes take time to formulate and even longer to filter down to sectors, companies and markets.

Market Reaction

US stock futures jumped and the US dollar rose as Trump’s victory looked imminent after a dramatic political comeback. Futures on the S&P 500 were up 2.3% in pre-market trading, reflecting expectations that a Trump-led government will cut corporate taxes, which would support earnings. Stocks in Asia were mixed; Japanese stocks closed up 1.9%, on the anticipated boost of a weaker yen against the dollar while the Hang Seng closed down 2.2%. European stocks advanced in morning trading. The US dollar strengthened against a basket of currencies. Yields on the 10-year US Treasury jumped to 4.43%.

Economic Policy Outlook

The new administration’s policy priorities would include significantly limiting the flow of goods, capital and people across borders. We also expect deregulatory efforts to support corporate profits, which may reduce the focus on environmental, social and governance (ESG) issues, while simultaneously boosting longer-term investment. Redistribution through social policies will likely be downgraded.

This policy revamp marks a big shift from the era of the Biden presidency. Under the new government, we expect the US economy to face more debt, higher inflation and less efficient growth. From a growth perspective, the two biggest moving parts are the fate of the expiring Tax Cuts and Jobs Act (TCJA), and tariffs.

Under a Republican presidency and Congress, we expected to see the TCJA fully extended with more tax cuts possible, which would help boost growth. However, new tariffs could ignite trade wars with US trading partners and accelerate deglobalization trends, while plans to crack down on immigration could push up US labor costs. The combined effect of these types of policies could fuel inflationary trends in the US economy and the drag of potentially higher tariffs could offset the impact of tax cuts. In our view, a unified Republican government is more likely to have inflationary consequences given the proposed tariff and immigration policies, as well as the prospect of continued rising deficits.

Investment Implications

In the wake of the election results, we think investors should not attempt to time market entry or exit. We think it’s more about managing portfolio allocations. In a sense, investors should overlay politics onto their fundamental views and target fundamentally attractive market segments likely to see a neutral, negligible or positive impact from potential policies. These include oil and gas, financial services, healthcare, and high-dividend or dividend-growth segments. For bonds, inflation protection seems sensible, as do select credit positions.

Across asset classes, our portfolio managers generally do not take positions in stocks or bonds based on political considerations. However, when evaluating holdings and investment candidates, our research analysts assess how policy decisions could affect the fundamental outlook for companies and issuers. Our investment teams will continue to evaluate the potential policy impacts on individual holdings. Here are some examples of areas that could be affected by the new government’s policies.

Key Policy Positions

Corporate tax and earnings—Trump has pledged to maintain the corporate tax rate at 21%, as per the 2017 TCJA, and has proposed potential further conditional tax cuts to 15%. This could alleviate some concerns that a potential increase in corporate taxes—as Kamala Harris had proposed—would erode corporate earnings.

Trade and Tariffs—Trump plans to impose a 20% universal tariff on imports from around the world, and a 60% tariff on goods from China. Tariffs would represent a de facto tax on US households, which would counter growth. Over time, domestic investment would increase to bring production closer to home, but this would be a long-term process. In the short to medium term, tariffs would increase inflation and reduce growth. Fundamental investment research should develop principles and parameters to gauge how an evolving tariff environment will affect different types of companies.

Infrastructure—Expect the new government to launch initiatives to upgrade US infrastructure, with an emphasis on highways and communication. These efforts are likely to be driven by incentives for private investment rather than massive government spending.

Immigration—Based on campaign promises, we expect the new government to end benefits for undocumented immigrants. This type of crackdown would most likely lead to a reduction in the low-wage labor pool, which could create headwinds for companies that rely on low-cost labor.

Defense—Trump’s stated policy goal is to reduce or end support for Ukraine to force a deal with Russia that would end the war in Ukraine. He also wants to ensure that Western Europe and other countries ramp up military spending and will seek to increase incentives for allies to increase military budgets. More broadly, the US may pullback from defense commitments to countries overseas.

Energy—Fossil fuel regulations may be reduced and changes could be made to the Environmental Protection Agency’s EV standards and EV credits from the Inflation Reduction Act (IRA). Still, we think fossil fuels and renewable energy initiatives are primarily driven by improving economics rather than regulation. Potential changes to components of the IRA may be relatively modest, as incentives for renewables have created jobs that benefit traditionally Republican states. If revised EV rules push out the EV adoption curve, automakers with less EV focus could benefit, as well as the oil refining industry.

Healthcare—The Trump campaign has said it would seek to reduce drug prices and expand domestic manufacturing of drugs. However, the administration's desire to reverse some elements of the Biden-era IRA may lead to more leniency and exclusions on new drugs brought to market.

Campaign promises don’t always lead to policy changes. In a Republican-controlled presidency and Congress, it will certainly be easier for the President and lawmakers to pursue new policies. Our portfolio managers will monitor the changing political environment to determine which sectors, industries and companies may be affected—positively or negatively—by potential policy changes in areas that could affect returns for different asset classes and securities.

_{The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.}