This election will have significant implications on how the US pursues trade relations. A Biden presidency could see investors price in a fundamental improvement with ties overnight, possibly putting an end to immediate tariff threats. However, it could also mean higher corporate taxes and a harsher regulatory environment, creating a downside for the economy.
In addition, Biden would probably look to repair Obama’s Iran nuclear deal and re-enter the Paris Climate Accord, which means sweeping changes could hit the energy sector if the Democrats win the Senate. The newly-elected Democratic president would also likely rejoin the World Health Organization and other multilateral bodies.
Regardless of who wins in November, we’ll likely see major infrastructure initiatives implemented in the US. It is expected that the country will see a massive infrastructure plan in 2021 and that should keep the S&P 500 attractive if progress is made with the fight against the coronavirus pandemic.
The S&P 500 index should remain well supported as cyclicals will outperform once the economic outlook improves and traders can get a better sense on when we can see the return to pre-pandemic behaviour. The biggest short-term risk for the S&P 500 index is if the Democrats sweep and take back the Senate and presidency. Financial markets will need to price in a tighter regulatory environment and higher corporate taxes. Prolonged weakness, however, is unlikely as investors will anticipate a more conciliatory tone on trade and a return of globalisation. A Trump re-election meanwhile would probably deliver a much more robust stock market, as long as there is a de-escalation in tensions with China.