US Election Outcome: What It May Mean for Policy and Portfolios
What We’re Watching
Monitoring Market Moves
US stocks moved higher as clarity of a Republican victory quickly emerged. Energy and financials saw gains, as did small caps.1 In our view, this reflects investor enthusiasm for domestic-focused names as Trump’s pro-growth agenda looks likely to include corporate tax cuts, looser regulation, and a continued focus on reviving US manufacturing. Stocks weakened in Europe, where renewed trade tensions are likely to weigh on growth. Asia equity markets diverged; with China shares lower on the prospect of new tariffs, while Japan and India equity markets responded positively. In fixed income, US Treasury yields rose, signalling some near-term uncertainty on fiscal expansion.2 We believe the ultimate implications for the level of yields will likely depend on eventual details of the Trump administration’s policy mix, which are still months away.
Mapping Out the Policy Picture
We expect the first 100 days of the Trump administration to be critical for assessing legislative priorities. If implemented, tariffs may impact growth and inflation through a variety of direct and indirect channels. Targeted tariffs imposed on China may have only small inflationary impacts. More expansive, universal tariffs across regions, including Europe, may amplify these effects, acting as a drag on growth. Trump’s re-election may also result in renewed defense spending and security pressures for Europe, adding to fiscal challenges. The international response and retaliation to higher tariffs remains unpredictable. More protectionist trade policy may present headwinds for companies with high exposure to international supply chains. Smaller companies could be less impacted given greater linkages to the domestic economy.
Tariff-related risks to the US economy could be at least partly offset by growth-supportive corporate tax cuts. Trump's promise to cut corporate tax rates is likely to be supportive for US corporate earnings. Reduced regulation in sectors like energy and financials could boost economic activity but will take time to develop, and analysis shows deregulation during the first Trump administration had a limited macroeconomic impact. A friendlier stance towards fossil fuel companies is likely. Trump may take a selective approach to repeal certain elements of the Inflation Reduction Act (IRA)—which has been a major catalyst for renewables in the US—rather than a blanket repeal. We do not expect the Republican administration to compromise on security at a supply chain, resource, and national level.
Focusing on the Fed and Macro Fundamentals
In the US, the Federal Reserve cut rates on November 7 by 25 basis points.3 We expect economic growth, the labor market and data on the health of the US consumer will be used to gauge the cadence of monetary easing over the coming months. We expect the Fed to take a data-dependent approach and await more clarity about what policy changes will take place. Our base case continues to be for a US soft landing but the distribution of potential outcomes has widened. Growth could be boosted from pro-growth measures, or potentially more fiscal expansion. However, the medium-term risks of higher inflation from tariffs and government spending have increased.
Capturing Potential Opportunities
We are staying focused on fixed income opportunities, broader equity horizons, and exploring alternative paths for differentiated returns.
In fixed income, we believe pro-growth policy and potential for tax cuts, as well as de-regulation, is likely to keep spreads tighter for longer. We expect demand for fixed income to remain robust as a higher-for-longer yield environment will underpin robust technicals and support for the asset class, keeping spreads contained across the board. In our view, active sector and issuer selection will be key as policy shifts create dispersion and potentially weigh on growth in Europe and select emerging markets economies.
In the equity market, our analysis shows that the weeks post-election are usually a good environment for stocks. A resolution of election uncertainty, resilient recent economic growth data and continued Fed rate cuts support the healthy near-term outlook for US equities. In addition, most S&P 500 companies have posted robust 3Q earnings so far, and we expect solid growth to drive US equity appreciation into 2025. Across non-US developed markets, a focus on high-quality businesses and consistent dividend payers may help to manage volatility and market drawdowns, which have historically been sharper in international markets than in the US.
Specifically, we see a potential inflection point for US small caps, driven by rate cuts and more domestic trade policy. More aggressive protectionist policies and focus on resource independence may provide further tailwind to US industrial manufacturing and support energy production. We also see opportunities internationally. While impacts on emerging markets will vary, India is a clear beneficiary, in our view, with an economy less exposed to US tariffs given its domestically-driven growth profile, profitable and diverse corporate universe supported by megatrends like digitalization, growth of an affluent middle class and a reform-oriented government.
We believe private markets and other alternatives also present opportunities to complement traditional market exposures. For instance, a stabilizing macro backdrop, greater CEO confidence, and more corporate M&A and initial public offering activity may act as a catalyst for a more normalized environment for private equity in 2025. We continue to find the resiliency and return potential of private credit appealing. Declining rates may paradoxically prove constructive to private credit, managing the supply/demand imbalance and normalizing spreads. In addition, we believe volatility and dispersion also make positive hedge fund returns more possible.
Staying Active Beyond the Ballot
As post-election policy priorities unfold and economies and markets adjust, selective alpha opportunities may continue to emerge, but investors will also have to watch out for other risks, including downside growth surprises and geopolitical shocks that could cause market volatility and pose risks to the commodity price outlook, as well as unknown challenges that will inevitably arise. Ultimately, we believe leveraging active investment strategies, diversification, and strong risk management can help navigate volatility and potentially capture upside.
1 Bloomberg, Goldman Sachs Global Investment Research. As of November 7, 2024.
2 Bloomberg, Goldman Sachs Global Investment Research. As of November 6, 2024.
3 US Federal Reserve. As of November 7, 2024.