Quick Thoughts: A big night for the Republicans

Election outcome: The results of the 2024 US election are in. The verdict is clear: A resounding Republican victory. Donald Trump will be the next president, and Republicans have picked up the Senate. The House is too close to call but, given the totality of Tuesday’s results, the GOP looks slightly favored to win a narrow House majority. Here are the implications for financial markets.

Market reaction: The strong market reaction reflects both the removal of potential uncertainty and the expectation of key changes to US policy.

• Prior the US stock market opening, US equity futures were up 2%–4%, led by the broader Russell 2000 Index and keyed by strong rotation to mid-cap stocks. Asian and European equity markets responded with more mixed results.
• US bond markets sold off sharply, with 10-year US Treasury yields rising to 4.47%, up nearly 20 basis points on the election news.
• The US dollar has jumped about 2% against the yen and euro. Cryptocurrencies have advanced strongly, up by 7%–9%. Oil prices have dipped by about 1%.

Market outlook: Assuming, as seems likely, that Republicans complete a clean sweep, of Congress, market moves are likely to continue in the coming days and weeks based on expectations for stronger growth driven by tax cuts, larger fiscal deficits and deregulation.

• Rising growth expectations are likely to boost corporate earnings, which may also benefit from lower statutory and effective corporate income tax rates (Trump has advocated cutting the corporate income tax rate from 21% to 15%).
• Rising business optimism about growth and a reduced regulatory burden is likely to lift business investment spending.
• The chief beneficiaries include mid-caps, fossil fuel energy companies, pharmaceuticals and financial services.
• The green subsidies in the Inflation Reduction Act will probably be rolled back considerably.
• Trump will have strong congressional backing to reduce and perhaps reverse immigration. This could impact the labor market, creating shortages in areas such as construction, restaurants and health care services.
• The markets will expect widening fiscal deficits under the Republicans, which we believe will push bond yields higher for at least two reasons. First, fiscal expansion will boost demand and hence growth. As a result, the Federal Reserve (Fed) will likely ease less than had been anticipated. Second, rising deficits will increase debt issuance. Yields on 10-year Treasuries are likely to push toward 5% over the course of the next few months.
• A combination of higher US interest rates and greater investment flows from abroad into US public and private equities will likely push the US dollar higher on the world’s foreign exchange markets.
• Cryptocurrencies will likely continue to advance, courtesy of a light-touch regulatory approach in a second Trump term.
• The outlook for commodity prices is mixed, in our view. Support for America’s oil industry and the prospect of growing supply could put further downward pressure on crude prices. So, too, could a stronger dollar. But stronger growth could lead to higher demand, a positive for energy and basic materials sectors.
• Geopolitical risks around the world will remain elevated, and defense spending is likely to increase.

Market risks: The chief risk for US and global equity markets is rising bond yields. To the extent that higher yields represent stronger growth expectations, the outcome is less problematic. But to the extent they reflect a rise in inflation expectations or a crowding out of investment due to projected large fiscal deficits, higher yields could cap overall equity returns.

• A related risk is that the Fed could halt its easing of US monetary policy and might even perform a U-turn with rate hikes. Rate increases could happen if accelerating growth leads to higher inflation. In that scenario, bond markets will watch closely for signs the Trump administration might try to curb the Fed’s policy-making independence.
• A final risk is US tariffs. On the campaign trail, Trump strongly advocated for sweeping, large tariffs. If that policy is realized, it could harm US and global growth (including via global trade war escalation), increase measured inflation, sap consumer purchasing power, and crimp corporate profits via higher input costs. It is more likely, therefore, that the Trump administration will use tariffs as a bargaining tactic in international trade and security negotiations.

Summary and conclusions: The US election outcome was a clear surprise, delivering a strong verdict about whom Americans prefer to run the country. The removal of uncertainty and the positive implications for growth have unleashed powerful advances in US equity markets, Treasury yields and the US dollar. Those moves are likely to continue in the weeks and months to come. But investors should watch for the risks of higher bond yields, a less accommodative Fed and the potential for rising global trade tensions. The Trump trade is likely going to run further, in our view, but we urge investors to be discriminating in the investment conclusions they draw from the election results.