As the U.S. election closes in on November 5, investors continue to weigh the potential impact of various voting outcomes. While all eyes are on the tight race between Vice President Kamala Harris and former President Donald Trump, voters will also decide on Congress, which is divided with the Democrats maintaining a small advantage in the Senate and Republicans doing likewise in the House. Ultimately, the combination of executive and legislative control will determine the scope of what the president will be able to accomplish.

We will leave the election forecasting to the political experts and instead look to provide readers with some insights on the candidates’ stance on economically important issues, and how that may impact certain sectors. We then take a historical, data driven perspective to look at how sectors and markets have performed during previous administrations. We believe this historical perspective is important and highlights that election outcomes are but one part of a complex network of variables that ultimately drive investment returns.

As we head into the fall, investors will have their eyes on a number of items in addition to the election, including the start of a Federal Reserve rate-cutting cycle, the balance of inflation and unemployment, and whether the economy executes a soft-landing. Our base case remains for a soft landing based on a resilient U.S. economy and a constructive outlook for macroeconomic and corporate fundamentals. However, one of our risk cases is that inflation remains stubborn, with the election outcome as one of the culprits.

Election Impact?

Key issues for candidates Trump and Harris include taxes, tariffs, regulation, climate change and immigration. On taxes, most provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 expire at the end of 2025, including the current reduction in the top marginal tax rate from 39.6% to 37%. The cost to extend this and other provisions of the TCJA is estimated at $3.3 trillion over the next 10 years. This staggering cost comes as the nation’s annual budget deficit reached $1.7 trillion in 2023. Each candidate has laid out their stance on taxes, but how this ultimately gets resolved depends on a number of variables including the combination of executive and legislative branch control. Creditors will be keeping a close eye on how this plays out, and how the outcome will impact yields and influence bond market volatility.

Regarding tariffs and trade restrictions, notably with China, we expect both candidates to continue longer run de-globalization trends, albeit with differences in their approach. On other issues, Trump’s stance on immigration can be expected to limit labor supply, potentially increasing the cost of labor, while Harris’s focus on climate change could see an increase in spending that impacts the cost of raw materials needed to facilitate a low carbon transition. Taken together, we can see the transmission mechanisms that may have an incrementally inflationary effect. In Exhibit 1, we provide more specifics on these areas as well as potential sector impacts. These represent the candidates’ stated views, but again we expect that many of these areas will be heavily negotiated in 2025 and beyond.

Sector Impacts: Much Ado about Nothing?

While rules and regulations impact the economy and individual sectors as highlighted above, history has shown that political control is not a robust indicator for sector returns. There are three main reasons this is the case. First, returns are ultimately driven by fundamentals — revenues, profit margins, capital decisions, changes in valuation, and the broader business cycle — along with market sentiment. Policy can have an impact on these variables, but is not at the top of the list of return drivers, and can operate at a significant lag. Second, there is a lack of clarity about certain policy details and what ultimately gets enacted, making it difficult to determine how policy may effect each of the return drivers even with the election results in hand. Third, unforeseen exogenous shocks such as the pandemic and ongoing wars in Ukraine and the Middle East continue to roil markets. Therefore, unforeseen events may influence sector returns contrary to what presidential policy may suggest.

To make this point clear, we evaluated the relationship between Democratic or Republican presidents and the relative sector performance six months post- election. Exhibit 3 indicates that, on average, the financials and communication services sectors performed better during Democratic presidencies. The materials and utilities sectors did likewise during Republican presidencies. While energy was strong under both parties, economic influences, like the pandemic, impacted results. These outcomes remained relatively consistent even a year after the election, indicating some post-election sector momentum.

The sample size is small — three Republicans and Democratic presidents — and the averages conceal a wide variation in results. In fact, only the industrials and materials sectors showed consistent (either all positive or all negative) returns for a given political party’s election years. In some regards, these results seem counterintuitive, but once again highlights the challenges of investing tactically because the expected impact from policy initiatives does not necessarily translate into returns.

Market Reactions: A Historical Perspective

This decoupling of political control and returns goes beyond sectors, and expands to include the stock market as a whole. As shown in Exhibit 4, there is no clear relationship between a president’s political party and stock market results. Rather, market movement is determined by a complex interplay of the economy, corporate fundamentals (revenues, profit margins, innovation), valuation and sentiment. Certainly, there is a relationship between policy and these variables, but it can be difficult to attribute the impact when looking at market performance.

For example, President George W. Bush presided over most of the lost decade of stock market returns, as his time in office was book-ended by a bursting of the dot-com bubble and the 2008 Global Financial Crisis. While those in charge hold some degree of responsibility for these events, there were plenty of outside forces at play that were contributing factors. The good news for investors is that market returns have been robust across presidential leadership, with the S&P 500 posting double digit returns in all but three administrations since 1945 (and returns during President John F. Kennedy’s term just missing double digits).

Nor does a presidency operate in isolation. A president’s ability to enact legislation that may influence market events is dependent on the makeup of Congress. Exhibit 5 shows the relationship between stock market returns and the executive and legislative branches since World War II. First, we show S&P 500 Index returns based on executive leadership (regardless of Congress) — effectively the political party averages of Exhibit 4. Those averages are then divided into whether the president had full congressional support or a split government, with the acknowledgment that the small sample size of the data prevents us from drawing conclusions between them. Regardless, as with the presidential analysis above, investors should take comfort in these results that, historically, the market’s returns have been robust regardless of the political permutations shown.

Conclusions: Preparation not Prediction

When facing significant uncertainty, as with the upcoming U.S. election, it is natural to think of the potential outcomes as binary — either good or bad. Frequently, however, the result is much more nuanced. Each candidate has laid out their stance on key policy areas, and while we hypothesized the incremental impact to certain sectors, mapping that to sector returns is fraught with challenges. We showed how sectors and markets in the U.S. performed across administrations and permutations of Congress. If anything, we hope these results comfort investors and highlight that strong stock market outcomes transcend who is in office. That said, investors can still prepare for risk cases based on the expected impact of policy. We maintain our base case of a soft landing supported by constructive fundamentals and easing inflation providing room for central banks around the globe to lower interest rates. However, one of our risk cases is that inflation remains stubborn, with election outcomes as a potential contributor.

As investors think through portfolio implications of the election, staying focused on strategic long-term goals is as important as ever. November’s results will certainly influence how the issues highlighted in Exhibit 1 ultimately get resolved, but investors should not lose sight of the fundamental drivers of market returns. Rather than trying to predict election outcomes and their impact on markets, we believe in preparing for different economic scenarios, remaining historically aware, and avoiding the urge to be overly reactive to changes in political leadership.