Donald Trump won the election by a clearer and wider margin than what was expected, and the Republicans gained control of the Senate. The last unknown is the House of Representatives, where Republicans also seem likely to have a majority given the strong Republican dynamic in Presidential and Senatorial elections.

The most likely scenario at this stage appears to be a Republican sweep, while a Republican administration with a split Congress is a possible alternative.

In the short-term, we believe this outcome is likely to be positive risk assets for 3 reasons. First, history shows that once a key political event is behind us, markets tend to lean in the direction of the trend. I.e. the current bull markets might get extended.

Source: Srategas

With a unified Republican government, the U.S. fiscal policy under Trump will focus on expansive tax cuts (for corporate and households), alongside increased government spending. Building on the 2017 Tax Cuts and Jobs Act, which lowered the corporate tax rate from 35% to 21%, Trump has proposed further reductions to as low as 15% for corporations, along with additional tax relief for individuals. This would increase disposable income for households and potentially boost corporate earnings, fuelling economic growth in the short term.

However, such cuts, especially if not offset by spending reductions, could widen the fiscal deficit considerably. According to the Committee for a Responsible Federal Budget, Trump's proposals could add $7.75 trillion to the national debt by 2035. Trump's potential focus on defence and infrastructure projects would require substantial federal spending, adding to the deficit.

Overall, this is positive for U.S. GDP growth and U.S. companies’ earnings. However, this is negative for the U.S. public deficit and debt trajectory. As it was the case in the U.K. back in 2022, bond markets could get nervous and have a disciplining effect on the next administration.

The new Trump administration envisions to deregulate aggressively. In the energy sector, the new Trump administration is likely to expand fossil fuel production at the expense of renewable energy. In the financial sector, Trump seeks reduced oversight.

A 10% baseline tariff on all imported goods, and a targeted 60% tariff on goods from China, are among Trump’s suggested policies. His goal is to reduce trade deficits and encourage domestic production. But retaliatory measures from trading partners could ignite a trade war, with inflationary consequences. There is a caveat though; Trump is a dealmaker and might have used this rhetoric as a negotiation tool. He is pragmatic and may very well understand that trade war could create significant downside risks on growth and upside risks on inflation.

The reshoring theme (which has been developing under Biden) is likely to be reinforced under Trump. He aims to bring manufacturing jobs back to the U.S. by imposing tariffs and incentivising companies to move production domestically. This could mean increasing costs for U.S.-based companies reliant on global supply chains, particularly in sectors like technology and automotive.

Trump’s immigration policies include measures such as mass deportations and stricter border controls. This could lead to labour shortages in industries dependent on immigrant labour. Reduced labour supply could increase wages (and thus inflation). It could also affect profit margins in some sectors.

Trump’s “America First” foreign policy stance is likely to impact international relations, especially with China but also Europe.

While the Federal Reserve operates independently, fiscal policy is likely to have significant consequences on monetary policy.

With higher demand stemming from tax cuts and higher government expenditure, coupled with tariffs. inflation might rise. This could lead to a more hawkish monetary policy.

A Trump victory in the 2024 election with a Republican-controlled Congress would likely lead to substantial shifts in fiscal, trade, regulatory, immigration, geopolitical and monetary policies.

The combined effects of the policies of Trump II on financial markets could be summarised as follows:

• Overall positive for U.S. equity markets, especially positive for financials (deregulation), industrials and materials (higher infrastructure spendings) and energy. It is potentially negative for Consumer discretionary (due to higher inflation and tariffs) and utilities (due to higher rates). The impact on non-US equities depends on developments on tariffs and likely retaliation measures by other economies.
• On the international equities side, Trump is negative for countries with significantly exposed to trade with the U.S. (China, Europe, Mexico, Canada, etc.). Friendshoring countries such as India and Vietnam may likely continue to thrive.
• U.S. rates are likely to be higher than previously expected, especially if Republicans gain the House of Representatives. We are likely to see less Fed rate cuts as downside risks to growth diminish and inflationary pressures are revived. We expect upward pressure on long-term rates due to higher nominal growth prospects + elevated and rising public deficits and public debt. A bear steepening of the yield curve is the most likely scenario if a Republican sweep is confirmed.
• On the Forex side, there are potentially mixed effects on the dollar, as fiscal concerns need to be balanced with yield-driven capital inflows. The Swiss Franc is likely to appreciate further against most fiat currencies.

• Commodities: There are mixed signals for oil. Gold and store of values might benefit as persisting inflationary pressures and monetary debasement caused by rising public deficits strengthen further the case for real assets as a store of value.
• Cryptos: Trump is the first crypto-friendly administration. We will address this topic in a separate note.