Stephen Dover, chief market strategist, head of Franklin Templeton Institute offers a first look at the unfolding outcome of the 2024 US elections and what it means for financial markets.
US Presidency
At the time of writing, the polls have closed in 48 states (Alaska and Hawaii to follow). The results thus far confirm the tight race that public opinion surveys had indicated.
Nevertheless, the odds have clearly shifted in favour of Donald Trump for president. He is likely to win the battleground states of Georgia and North Carolina. In Pennsylvania, early results suggest that Trump is outperforming his 2020 performance. Accordingly, the odds of Trump carrying the crucially important state of Pennsylvania have improved. In the other two midwestern swing states of Michigan and Wisconsin, the outcome remains too close to call.
In contrast to 2016, Trump is also running in a near dead heat with Harris for the national popular vote.
At this juncture—and we emphasize it is still too early to state anything with full conviction—Donald Trump has the inside track to become the 47th President of the United States. According to models produced by the New York Times, Trump has more than an 85% chance of winning the electoral college with a likely total of 299 votes, 29 more than required to regain the presidency.
US Senate
Matters are also becoming clear in the US Senate, where Republicans—as predicted—will regain a majority. Potentially vulnerable incumbent Republicans in Florida and Texas have won re-election. Democrats have lost Senate seats in West Virginia and Ohio and are likely to lose in Montana as well.
US House of Representatives
The picture is less clear as regards the US House of Representatives. In either case, the winning party is likely to have a small majority. Nevertheless, a Republican hold of their House majority would create space for considerable legislative achievement, including significant changes to US tax policy.
Assessment
In the event of a Republican ‘clean sweep’, the extension of the 2017 Trump tax cuts is assured. It is probable that the statutory and effective corporate tax rates will be lowered (the former to perhaps 15%) and that sweeping changes to business regulation will follow. What is less certain is whether tariffs will be increased on the scale and scope matching Trump’s campaign rhetoric. That outcome will likely be determined on a case-by-case via bargaining among trading partners and with considerable input from the US business community.
Implications for Financial Markets
US equity futures markets are responding favourably to the probability of a Trump presidency and a possible ‘clean sweep’. US equity futures have risen over one percent, with a larger gain from the broader Russell 2000 futures index. The biggest winners will be sectors and industries welcoming a more business-friendly regulatory environment, including fossil fuel energy companies, financial services and smaller capitalization companies. Fears of caps on prescription drug prices will recede, boosting the fortunes of the pharma sector.
The bond market, in contrast, is selling off sharply, with ten-year Treasury yields approaching 4.50%. Bond investors are reacting to the probability that tax cuts will not be accompanied by significant spending restraint. The bond market also anticipates stronger growth and possibly higher inflation. That combination could slow or even halt anticipated Fed rate cuts.
The US dollar is advancing on foreign exchange markets, boosted by the combination of higher US bond yields and the anticipation of strong inflows into US public and private equity markets.
Conclusions
We emphasize that the US election outcome is not yet official, and key swing states remain uncalled. But most signs point to a significant Republican victory. If that materializes, ongoing stock, bond, and currency market moves will be reinforced. At some point, however, rising bond yields may cap equity market gains.
