2024 US Election

The 2024 US presidential election is likely to be decided by narrow margins in a few battleground states, as the electorate has become deeply divided. Polls indicate an expanding lead for Trump over Biden in what was expected to be a close race before the first presidential debate. Two historically unpopular candidates, Biden’s age, and Trump’s legal troubles add an exceptional level of uncertainty.

Our base case is a Trump win with a unified government conditional on Biden staying in the race, with a divided government the next likely scenario. If Biden wins, a divided government would be the most likely outcome compared to a sweep. However, we assign a significant probability to Biden dropping out of the race, in which case most signs point to Vice President Kamala Harris becoming the Democratic nominee. We stand ready to adjust our scenarios depending on who the replacements are on the ticket. Our working assumption is that the policy agenda of a replacement nominee would look similar to Biden’s.

We expect Trump’s policies on taxes, trade, and immigration to be more inflationary than those of a Democratic president. Macro uncertainty also rises under Trump, as the range of outcomes is wider.

A second Trump administration would be much more protectionist and combative than a second Democrat administration, with trade tensions rising for both adversaries and allies. Tariffs and restricted labor supply from reduced immigration would clearly boost inflation. The scope of any potential tariffs under Trump is significantly wider than in his first term, but we would treat the proposal of a 10% universal tariff and a 60% tariff on Chinese imports as the upper bounds of any eventual outcome.

The growth impact under Trump is mixed, as tariffs and immigration restrictions are likely to have a negative effect near term, but could be offset by tax cuts and deregulation. The growth impact would lean negative if there is a divided government under Trump, as significant tax cuts would have to be ruled out and tariffs would likely weaken US and global growth.

Under all scenarios, we expect some or most of the 2017 Trump tax cuts to be extended once they expire at the end of 2025, raising the deficit relative to a full roll-off of the tax cuts, which is the current law. There is a lack of political consensus on both sides to address fiscal (un)sustainability. A focus on industrial policy and deepening political polarization suggest meaningful debt reduction is unlikely any time soon.

The fiscal deficit is likely to rise the most under a Republican sweep as Trump has proposed additional tax cuts that cannot be fully funded by revenue generated from tariffs. The deficit increase would likely be smallest under a Democratic sweep as the agenda focuses on raising taxes on high-income earners and corporates. A divided government is likely to produce a deficit somewhere in the middle with limited extension of the tax cuts and not much more.

We expect a hawkish tilt to monetary policy under Trump, and little change under Biden. In the next two years, we expect 225bps of rate cuts, bringing the policy rate to 3% by the end of 2026. Under a Trump presidency, we would remove 75-100bps of rate cuts from the baseline, as the boost to inflation from tariffs and restricted immigration and the boost to growth from tax cuts and deregulation outweigh a negative growth shock from tariffs. Although the risk of an unorthodox candidate for a new Fed chair, who could be directly influenced by the president, arises under a Trump presidency, we see it as unlikely that the executive branch would de facto set monetary policy.

The current macroeconomic backdrop differs significantly from the onset of the previous presidential races in 2016 and 2020 - a deteriorating fiscal trajectory and above-target inflation introduce new uncertainties.

Fixed income: Whether we see new tariffs that push inflation higher after the election will help determine the trajectory of policy rates in the years ahead. In the case of a Republican sweep, the Fed could cut the fed fund rate only to 4% by end-2026 from 5.5% currently, which is largely in line with current market pricing. Nevertheless, we could see the 10-year US Treasury yield rise from 4.2% (on July 11) towards 4.9% by end-2025, as a number of factors (among them, a sustained increase in the US fiscal deficit) point to a structural rise in the 10-year term premium from its current low level of 0.13% (on June 30). In the case of Trump winning but Congress being divided, the impact of higher tariffs on economic growth would not be fully offset by more fiscal stimulus. In this situation, we could see a limited rise in the 10-year yield to around 4.6% by end-2025 in a context where the Fed still has room to cut the fed funds rate to 3.75%. The scenario of Democrats winning the election is the most favourable for US Treasuries in our view, as this would enable the Fed to cut rates to as low as 3% by end-2026 which is about 100 bps lower than recent market pricing. Under this scenario, we would foresee the 10-year US Treasury yield falling below 4%, likely settling at a level of around 3.7-3.8% by end-2026.

Equities: While geopolitical newsflow can create short-term volatility in equity markets, longer-term performance will reflect the extent to which political decisions impact subsequent economic growth, interest rates and profit trends. We do not believe any of our election scenarios explicitly represent an outright ‘good’ or ‘bad’ outcome for stocks as each contains a mix of positive and negative implications. For example, while we expect markets will react most positively to a Republican ‘clean sweep’ initially on hopes that further tax cuts and deregulation foster stronger profits, the prospect of higher tariffs means this is likely to come at the expense of stickier inflation, fewer rate cuts and higher yields. This trade-off suggests that a repeat of the low quality, pro-cyclical rotation we saw after Trump’s 2016 victory is unlikely to be sustained. Nor would such an outcome be a major threat to US tech leadership. While we believe a Republican victory is likely to lead to a bigger ‘knee-jerk’ equity rally, this doesn’t imply that a Democratic win would represent a negative for US stocks, especially if it comes with a divided congress which represents the current status quo. A Republican victory should favour US stocks over their global peers given the prospect of additional tariffs and a stronger USD. We see less US election risk for Japan than either Europe (more sensitive to trade restrictions) or EM (negatively exposed to stronger USD).

FX: Under our base case of a Trump victory and a Republican House (a ‘clean sweep’), the US dollar will likely strengthen significantly, mostly due to the imposition of wide-ranging tariffs (though the net effect of these will depend on any retaliatory measures adopted by the US’s trading partners). In addition, protectionist measures will likely have an inflationary effect, which would lead, all else being equal, to higher policy rates and an upward shift in the yield curve. Even if price and rate shocks weigh on domestic demand in the short term, US growth is likely to continue to outperform that of its peers. Our belief that equity markets would continue to perform well under a Trump presidency is likely to bolster sentiment towards the USD. Finally, the prospect of sustained re-shoring, increased capital expenditure and a manufacturing revival provide fundamental support for the USD in the medium term. We expect the EUR/USD rate to be at 1.05 at end-2024 and at 1.02 at end-2025. In case of a divided government, the appreciation effect would be less pronounced given the constraints on policies dependent on legislative approval. In the case of a Biden victory, the USD would likely depreciate slightly as lower interest rate levels could bring valuation concerns back to the fore.

In this note, we analyse the state of play in the presidential and congressional races, and the economic impact of different election scenarios. We then dive deeper into fiscal policy, trade policy, immigration policy, and monetary policy.