The American presidential election seen by Mirova

Policy differences between the two candidates, implications for equity markets and perspectives from the Sustainable Equities team.

A few hours before the US presidential elections, Mirova’s Sustainable Equities team shares its analysis of the situation and the potential implications in the event of victory for either candidate.

Major policy differences between the two presidential candidates

As in the 2016 and 2020 elections, voters are being presented with divergent policy platforms. The main policy differences, which are expected to have significant implications for financial markets, concern trade and taxation, which have been central to both campaigns.

Under Trump, tariff hikes are almost certain, an extension of individual income tax cuts is also likely (Tax Cuts and Jobs Act), and corporate tax cuts could be considered. Under Harris, tariff policy would have to be much more selective, while corporate and capital gains tax rates could rise, and personal income tax cuts would likely focus on the middle class. The candidates also differ in other areas, including on climate and energy (including the Inflation Reduction Act and environmental regulations), the North Atlantic Treaty Organization (NATO), immigration and social care.

However, entrenched divisions between the two parties make bipartisan cooperation 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 houses of Congress.

We think overall that a Trump victory with a Republican sweep would initially be slightly positive for US stocks (tax cuts) and clearly negative for non-US stocks sold in the US market and for US importers. Small domestic companies should outperform in our view. Cyclical stocks could struggle, given pressure on global trade from a Trump-led trade war. Trump with a divided Congress would, in our view, be neutral for US stock markets and negative for non-US stocks, with tariffs becoming the centerpiece of the policy agenda.

On the other hand, we believe that a Harris victory with a Democratic sweep would initially be slightly negative for US stocks (fiscal risk). Large-cap stocks and cyclicals would outperform. The losers of Trump’s trade war (non-US stocks/importers), who have so far failed to react to Harris’ improving poll numbers, would experience a relief rally, while US corporate taxpayers would underperform any further. A Harris victory with a divided Congress, however, should be largely neutral for most workers.

A Harris victory would also favor certain sectors like renewable energy and we expect an initially negative reaction from stocks linked to traditional energy (fossil fuels), stocks falling on the dollar, consumer stocks benefiting from the credit of child tax and measures supporting the consumption of working and middle-class households, which would be negative in relative terms for banks (more regulation) and stocks with high share buybacks or low taxes. The opposite would be true if Trump wins.

On interest rates, if one party wins a majority in both houses of Congress, it will give the new president and his administration plenty of room to maneuver on new fiscal stimulus, including priorities. will vary depending on whether Democrats or Republicans hold the majority. Their spending could fuel inflation and convince the Federal Reserve to maintain its conservative stance. However, we expect a Republican wave to have the strongest impact.

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

Investment opportunities and risks according to each potential administration

A Trump administration would have a largely unfavorable impact on:

• European exporting companies, particularly German manufacturers, who we believe would be hit hard;
• European governments: we have calculated that European NATO member states should spend at least 75 billion euros per year on their defense budget; this could lead to austerity measures to finance the budgets mentioned above, thus increasing the possibility of recession in the Eurozone.

A Trump administration could have a more favorable impact on companies exposed to US consumer discretionary.

Opportunities: US small caps, excluding automobile manufacturers.

Risks: re-emergence of inflation, although limited; with German manufacturers suffering more losses.

A Harris administration would have a more favorable impact on European businesses, but would likely result in more strained relations with Russia, which would weigh on consumer confidence in Europe. We also believe that the increase in corporate tax rates for US companies, as planned in the Democrats’ platform, will not be a determining factor in itself, and that stock markets will quickly price it into their prices.

Opportunities: American companies; some valuable European companies.

Risks: exacerbated geopolitical tensions.

Market risks after election day

It is common for economic and investor uncertainty to increase as an election approaches. This time, the uncertainty could continue beyond this. If the election result is close in one or more states, we can expect challenges and appeals. In 2020, Donald Trump has not acknowledged his defeat and accusations of fraud are frequent in his speeches. Uncertainty affects economic behavior. In its third quarter 2024 survey of CFOs, the Federal Reserve Bank of Atlanta found that a third of companies surveyed reported reducing or postponing investment plans due to this election uncertainty. Depending on the outcome, businesses will not be subject to the same taxes and business uncertainty could re-emerge stronger than before. In a very close presidential race, uncertainty regarding other elections, as well as the possibility of fraud allegations, will maintain high uncertainty among investors as the election approaches, likely leading to increased market volatility leading up to and after this one.

In all scenarios, we expect the market to experience volatility. As active long-term investors, we could seize the opportunity to exploit short-term divergences in price and long-term value.

Key strategic themes expected over the next 1-3 years, regardless of election outcome

Regardless of the outcome of the election, there are a few key long-term themes that we believe will remain in focus and continue to develop over the medium term. On the one hand, we continue to see growing demand for generative AI applications and automation, and, alongside this, rising energy demand and a need for improved energy infrastructure. We believe that renewable energy and storage will need to play a role in meeting future energy needs. We also continue to focus on the long-term opportunity in GLP-1 and other healthcare innovations addressing some of the leading causes of death, including oncology, cardiovascular disease and neurological diseases. Finally, we expect certain areas of environmental regulation to continue to develop; In particular, we anticipate 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. water.

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