At the start of the year, one of the most frequently analyzed topics was the volatility that the U.S. elections could bring to the market. However, what was not anticipated was the volatility stemming from the candidates themselves.
The dynamics of the U.S. elections have been altered by President Joe Biden’s resignation and the entry of Vice President Kamala Harris, leading to a new electoral probability landscape.
In this context, UBS Global Wealth Management has adjusted its probabilities for the possible scenarios.
According to a report shared on LinkedIn by Solita Marcelli, Chief Investment Officer Americas, Harris has a 40% chance of winning the Presidency with a divided Congress. On the other hand, UBS warns that the probability of a possible Trump red sweep has decreased from 40% to 35%.
Harris remains below Trump in the likelihood of winning with majorities in both chambers, but the trend is positive, rising from 10% to 15%.
Lastly, the possibility of Trump winning with a divided Congress has dropped to 10%.
According to UBS, if Harris wins with a divided Congress, there will be limited changes in policies, and thus, a more moderate impact on financial markets.
Additionally, policy enacted through executive action and regulatory oversight will continue significantly, although recent Supreme Court decisions are likely to reduce the Executive Branch’s agencies’ ability to interpret federal statutes. Support initiatives for green energy, efficiency, and electric vehicles are expected.
On the other hand, if Trump wins with majorities in both chambers, UBS expects the extension of the 2017 tax cuts, with a potential further reduction in corporate tax rates. The funding for these projects might come from cutting the green energy provisions in the Inflation Reduction Act.
According to the report led by Marcelli, stock markets would applaud lighter regulation and lower taxes, but this could be partially offset by concerns about the costs and inflationary impact of higher tariffs and trade wars.
The Dutch bank ING presented three possible outcomes for the U.S. elections and analyzed the implications from four perspectives: domestic policy, foreign policy, trade policy, and monetary policy.
The first scenario is the “red sweep” with Trump as president and Republicans winning both chambers.
Domestic Policy: Expanding the 2017 tax cuts as a priority. New immigration controls. No significant fiscal consolidation.
Foreign Policy: Less support for Ukraine and Taiwan. Trump focuses on domestic growth and employment.
Trade Policy: Tariffs, with China particularly exposed. Implementation might be delayed as initial focus is on domestic policy.
Fed Policy: A loose fiscal policy is likely to be accompanied by more restrictive monetary policy if the Fed takes its 2% inflation target seriously.
The second possible outcome is Trump as president but with a Democratic Senate.
Domestic Policy: Trump could extend the 2017 tax cuts, but Democrats might block new cuts and spending priorities.
Foreign Policy: The domestic agenda is limited, so a greater emphasis on foreign policy is likely, with Trump seeking a deal with Russia over Ukraine.
Trade Policy: Trade protectionism is faster and tougher as Trump seeks to leverage actions he believes will boost the U.S. economy.
Fed Policy: Persistent inflationary fears from tariffs and extended tax cuts might make the Fed wary of cutting rates too much in 2025.
Finally, ING estimates the possibility of Harris as president with Republicans dominating the House of Representatives.
Domestic Policy: Increased taxes for businesses and the wealthy, but tax credits and spending in other areas suggest modest fiscal consolidation.
Foreign Policy: Continued support for Ukraine, but funding is restricted by Republican opposition. Middle East tensions persist, and Taiwan maintains U.S. support.
Trade Policy: A more “carrot” approach of incentives for offshoring rather than Trump’s “stick” of tariffs.
Fed Policy: The Fed feels more compelled to bolster the U.S. economy given the reduced fiscal support.
For Funds Society