No, not at this time. Republicans scored a sweeping election day victory, with Donald Trump winning the presidency and the party on the cusp of controlling both chambers of Congress. Trump will have wide latitude to deliver on his policy agenda, which includes aspects such as tax cuts, additional tariffs, and immigration reform. While these policies will impact markets, we expect other factors will be larger drivers of long-term investment performance. We think investors should keep equity allocations aligned with broad policy targets and maintain modest overweights to less expensive areas within equities, such as developed markets value and small-cap stocks.
US equity markets have delivered high returns across most administrations, generating double-digit average annual gains under every president since World War II except two. During the two presidencies that missed this bar, markets were upended by hard-to-predict events—the 1973 oil shock in the Nixon Administration and 2008–09 Global Financial Crisis in the Bush Administration. Over long investment horizons, markets are driven by corporate earnings growth, which itself is primarily driven by economic productivity growth. While politics can influence the macro backdrop, it can often serve as a source of noise that can obfuscate the underlying trend.
Regardless of the election outcome, US equity returns over the next several years may not be as strong as recent averages (the ten-year annualized return for the MSCI US Index was 12.3% as of October 31). These returns have significantly outpaced earnings growth, resulting in stretched valuations. While this is most true for mega-cap growth stocks, even the price-earnings ratio for the equal-weighted US index is rich by historical standards. As a result, we continue to believe that investors should stay close to policy targets in equities but make modest tilts within this basket to developed markets value and small-cap stocks, where valuations look more compelling.
Given likely congressional support, some of Trump’s proposed policies could be positive for equities. Proposed cuts to corporate tax rates for companies that “make their product in America” would boost corporate earnings, as would extensions of household tax cuts under the Tax Cuts and Jobs Act. These tax proposals would disproportionately benefit companies with high effective tax rates that derive more revenue domestically (e.g., small caps as well as retailers and consumer goods). A lighter regulatory touch could also benefit certain sectors, for example banks (if Basel III proposals to boost capital levels are pared back), energy firms (if permitting is streamlined and liquefied natural gas export licenses are granted), and utilities (if emissions rules are rolled back).
Conversely, new headwinds could arise for some equity sectors. Trump’s proposed universal tariffs of 10% on all US imports and 60% tariffs on imports from China (or greater) will either result in higher prices—which would act as a drag on consumption—or, if tariffs are absorbed by retailers, result in slimmer margins for purveyors of goods such as clothing, electronics, and home goods. Certain beneficiaries of Obama and Biden-era legislation could also suffer if particular programs and tax credits are allowed to expire. Examples include expiring healthcare subsidies under the Affordable Care Act (which could hurt managed care operators) as well as electric vehicle credits under the Inflation Reduction Act, which, if they expire, would impact car manufacturers. Clean energy might do better than feared, as many projects are creating jobs and investment in Republican-led states.
Even prior to the election, US budget deficits were expected to rise going forward, increasing debt issuance. The Congressional Budget Office has projected that the national debt held by the public would rise around 20 percentage points over the next decade to roughly 122% of GDP by 2034. Corporate and household tax cuts without meaningful spending reductions would mean larger deficits. Bond markets (both nominal and TIPs) have aggressively sold off in recent weeks, reflecting stronger US economic data but also the potential for larger deficits and inflationary pressures. Several dynamics will influence where yields stabilize. Greater stimulus—combined with fresh tariffs—could boost inflation, complicating the Federal Reserve’s case to continue monetary easing. However, the growth outlook will also come into play, and proposed immigration reforms are likely to offset some of the boost to growth from proposed fiscal stimulus. We are closely watching for indications that bonds become oversold to again consider adding positions like longer duration Treasuries.
More fiscal stimulus should help to prolong the relative economic growth advantage enjoyed by the United States, supporting the dollar. However, as with yields, the incremental upside for the greenback may be limited by the adjustment that has already taken place in recent weeks. Over the longer term, the outlook is less constructive as the currency looks overvalued by most metrics, some of the proposed policies could curb US economic growth, and we expect the Fed to continue easing.
All told, these election results, and the anticipation of them, have delivered boosts to equities and the dollar, and caused a sell-off in bonds. There may be scope for these trends to extend as markets digest the results and additional policy details are rolled out by the incoming Republican administration. Nonetheless, we believe that valuations and the broader cyclical environment will continue to be the dominant driver of investment performance. While we currently do not recommend making any material portfolio adjustments in response to yesterday’s elections, we would be diligent in both rebalancing away from assets that become overbought (e.g., large-cap US stocks) and to oversold assets (e.g., US Treasury bonds) following yesterday’s elections.
Wade O’Brien, Managing Director, Capital Markets Research