The Election, the Economy and the Markets—CIO Weekly Perspectives

By Joseph V. Amato, President and Chief Investment Officer—Equities

Taxes, tariffs, regulation and the deficit: What do we know about the U.S. presidential candidates’ economic proposals and their implications for investors?

We are just two weeks away from the U.S. presidential election, and the polls are extremely tight. While most observers are likely tired of hearing about and talking about this election, it remains important for the global economy.

It is also significant for markets, as the two candidates’ policy proposals differ quite a bit on taxes, trade and regulation. What can we make of their stated positions, what are the chances of them becoming policy, and what might be their impact?

Taxes

There are two elements of the tax proposals to consider: personal and corporate. On personal taxes, the differences are important, as the U.S. consumer, a major engine for the economy, could be materially affected.

Donald Trump says he wants to extend the personal tax cuts passed in 2017, which are due to expire at the end of 2025 (and thus, would be a major tax increase for all Americans). Those cuts came in the form of higher standard deductions, a lower top marginal rate, more generous child tax credits and lower estate taxes.

While Vice President Kamala Harris has not been explicit, the Biden administration previously suggested extending many of the 2017 cuts, but only for those earning less than $400,000 a year. Harris has also said she wants to expand housing tax credits. Perhaps the most eye-catching difference on personal taxes is Harris’s “billionaire minimum tax”—a Biden plan to tax unrealized capital gains on wealth exceeding $100 million.

There are also clear differences on corporate taxes.

Harris would look to raise the corporate rate from 21% to 28%—again, this is a proposal floated earlier by President Biden. Trump has proposed lowering it to 15%, at least for companies that manufacture their products in the U.S.

A cut or a hike of these proportions would be a big deal. A one-percentage-point change in the corporate tax rate could add or subtract just under 1% of S&P 500 Index earnings. Thus, a five-percentage-point move up or down could move 2025 S&P 500 earnings from the current consensus of +15% to either +10% or +20%, all else being equal.

Trade and Regulation

The differences on trade and business regulation are stark, and, importantly, driven more by executive branch administrative action and not necessarily subject to Congressional approvals.

Harris looks likely to retain much of the Biden administration’s approach, which has been specifically targeted against China’s growing dominance of global supply chains. Allies of the U.S. tend to get a lighter touch, but there are modest barriers around specific technologies and sectors.

Trump’s proposals are more broad-based and protectionist. Coming into last week, we knew about proposals to impose 60% tariffs on all goods from China and 10% on all other imports; at the Economic Club of Chicago on Tuesday, he raised the rhetoric, particularly on autos.

National security gives the president some scope to impose tariffs without approval from Congress, as Trump did on aluminum and steel in 2018, but it also seems likely that Trump’s more aggressive trade proposals are conceived as a starting point for negotiation. While the destination is uncertain, the direction is clear.

Goldman Sachs economists have estimated that Trump’s 2018 – 19 tariffs raised prices across a basket of affected goods by more than 3%. The bank estimates that a 20% tariff on goods from China would delay getting to 2% inflation by around 18 months, while a broad 10% tariff would cause a reacceleration toward 3%, peaking in summer 2026.

On regulation, we see two areas of importance for markets: antitrust policy and the permitting process.

It’s expected that a Harris administration would be broadly consistent with Biden’s on both fronts. The current antitrust approach has been characterized by novel efforts to block mergers and potentially break up companies. There seems to be a broad attitude of fighting “bigness.” For the permitting process—critical to adding new capacity in the manufacturing, energy and power sectors—we see little change in an area that has been a frustrating topic for private-sector operators.

Trump is perceived as more business-friendly, less resistant to M&A and more laissez-faire on regulation—particularly the federal permitting processes for energy and infrastructure projects.

Divided Government?

While there is always anxiety in markets when change is coming—either way, there will be a different person occupying the White House—we do not see a high probability of either candidate’s more extreme proposals becoming law.

We think it is likely we’ll see divided government, with the Democrats retaining the House of Representatives and the Republicans taking the Senate. As a result, Congress is likely to apply its reins to whoever wins the presidency.

Debt and Deficits

Perhaps most importantly, neither candidate appears willing to address the U.S. debt sustainability issue. There seems to be little appetite to cut defense or entitlements spending, two of the three biggest elements of the federal budget (interest expense being the other).

The Penn Wharton Budget Model garnered a lot of attention with its estimate that Harris’s tax and spending proposals would add $2 trillion to primary deficits, cumulatively, over the next decade, while Trump’s proposals would add just over $4 trillion.

Economists’ projections show only a modest difference in the deficit under each candidate over the next five years: Broadly speaking, Harris’s proposals show a deficit-neutral redistribution from corporate and higher-income taxpayers to lower-income taxpayers; Trump’s show a slight deficit reduction, assuming tariff revenues offset lower taxes. Again, divided government is expected to soften the effect of either president’s proposals—and, in both cases, slightly improve the debt outlook.

Uncertainty and Volatility

The broad-brush interpretation of these policy positions is that a Trump administration would result in faster growth but higher inflation, a Harris administration would result in less growth and inflation, and divided government would split the difference.

For investors, a Trump victory might be expected to benefit small caps, midcaps and sectors that are more sensitive to regulation, such as energy, power, industrials and financials. It could be uncomfortable for fixed income, as inflationary concerns could create more volatility. A Harris victory would be more of a continuation of current policies, perhaps resulting in investors’ attention reverting to the wider economic environment and a broadening of equity market performance.

A contested or delayed result is likely to raise volatility. (The S&P 500 declined almost 12% from election day to mid-December after the Bush/Gore 2000 election, although many other factors were at play.) But history suggests that, once the result is known, a relief rally is likely to greet whoever enters the White House. Let’s all buckle our safety belts—the next few weeks, and potentially months, will be quite a ride.