Investment Implications of Presidential Election Results

Republican Donald Trump reclaimed the White House and Republicans gained control of the Senate as a result of Tuesday’s election. As of this writing, the House is too close to call, but Republicans look headed for a slim majority. We have the following initial thoughts on the election outcome.

• If the Republicans retain a majority in the House, the party will be able to pass certain legislation, such as tax reform, without support from the Democrats. On the other hand, if Republicans lose control of the House, then the resulting divided Congress means the incoming President will only be able to implement executive actions such as tariffs and regulations. Passing legislation would require compromise with the House Democrats.
• Trump’s signature legislative achievement in his last term was 2017’s tax reform, which lowered the corporate tax rate to 21% from 35%. Major pieces of the 2017 tax law expire at the end of 2025, and Trump wants to extend all the expiring tax cuts and lower the corporate tax rate further. Financials and small-cap stocks were major beneficiaries of the lower corporate tax rate and are rallying as a result of Trump’s victory.
• The Trump platform calls for deregulation, with Trump significantly reducing regulation last time in office. Technology, financials, industrials, energy, and small companies (with limited resources) are all beneficiaries of a low tax and regulatory environment.
• A Trump administration is likely to bring a more laissez-faire approach to antitrust enforcement, though major technology companies may remain targets of enforcement.
• While the Biden administration left many of Trump’s first-term tariffs in place, primarily directed at China, the Republican platform calls for tariffs to be raised further. Trump is promising across-the-board tariffs on U.S. allies as well as enemies, as well as significant new tariffs on China.
• Protectionist trade policies would favor domestic companies but would impose higher costs on U.S. retail goods, negatively impacting U.S. consumers and the retail industry. While higher tariffs would disproportionately hurt China, they also create business uncertainty and hurt U.S. multinationals with significant international and Chinese sales due to potential retaliation from Chinese and other trading partners.
• Drug price controls and cuts to Medicare Advantage are a lot less likely under Republicans, to the benefit of pharmaceutical and health insurance firms.
• The traditional oil & gas industry is a beneficiary of Trump’s energy policies. Traditional energy should benefit from lower regulation and Trump supports exporting more natural gas. The Inflation Reduction Act’s clean energy subsidies will probably get rolled back (including for electric vehicles).
• Geopolitical risks around the world remain elevated, and defense spending is likely to go up.

We once again reiterate that investors remain in a portfolio consistent with their well-reasoned asset allocation. The macroeconomic environment that underpins a president’s term is typically the major driver of investment performance. Consequently, investors are usually best served by focusing on their long-term investment goals rather than which political party is in control for an election cycle or two.