Take-aways

• Not only is the election of the president decisive, but also that of Congress.
• Kamala Harris wants to raise taxes; Donald Trump wants to reduce them.
• If the party of the president does not also control Congress, extreme decisions are unlikely.
• The most likely outcome at the moment: a President Harris with a split Congress.
• Trump’s tax plans would be positive for US stocks, while trade tariffs would be negative.
• Monetary policy likely exerts more influence on financial markets than the US election.

In a year in which elections have already taken place in many countries, the most important one is yet to come. On 5 November, the US will decide who will lead the country for the next four years. And this not only goes for the president, but also for much of Congress. Even though the media focus is clearly on the presidential election, what form of Congress the president will face is also an important question. After all, election promises can only be fully implemented if the two legislative bodies are controlled by the party of the new president. These promises include planned tax increases for high earners and companies by the Democrat Kamala Harris, while the Republican Donald Trump is mainly promising tax cuts and the introduction of trade tariffs. 

According to recent polls, the most likely outcome of the election is that Kamala Harris will be president, but with a split Congress: the Democrats will control one body, the Republicans the other. This scenario, in which the party of the president does not have a majority in both legislative bodies, has occurred often in recent decades. This means that the president’s room for manoeuvre is limited and extreme decisions are unlikely. As a consequence, there should be no significant reaction on the financial markets.

Comparing political plans

The second most likely outcome is also the most dreaded: a President Trump with a Congress controlled by the Republicans. The agenda would then primarily focus on tax cuts that would give a boost to US stocks. But if tariffs on imports are introduced as Trump has announced, these would be a burden on the US economy, which would lead to lower economic growth and higher inflation. This would have an adverse effect on the stock market, as it would eliminate the positive effects of the tax cuts. By contrast, the US dollar would benefit. Without a majority in Congress, a President Trump may not have the ability to implement all his plans, but he would still be a source of uncertainty.

Financial markets in focus: what really matters?

Although the US election may have an impact on financial markets, there are other factors that are likely to be more important. First and foremost is monetary policy, as well as the related question of how quickly and to what extent the central bank will lower interest rates. Developments in the field of artificial intelligence are also relevant for US stocks.