Quick View: A win for Republicans boosts US stocks
Marc Pinto, Head of Americas Equities, and Lucas Klein, Head of EMEA and Asia Pacific Equities, say a surprisingly straightforward U.S. election could provide additional momentum to U.S. stocks through the end of 2024. But it remains to be seen how policy will impact future earnings—the real driver of long-term returns.
6 minute read
Key takeaways:
- The U.S. election has avoided a drawn-out vote count for the presidency, eliminating uncertainty for markets amid a big win for Republicans.
- U.S. stocks rallied on the prospect of pro-growth Republican policies. History shows, though, that over the long term, equity performance has been indifferent to election outcomes.
- More important are factors such as earnings growth and interest rates, which are trending positive through the end of 2024 and should be what investors focus on, in our view.
Investors have spent much of 2024 trying to make sense of the U.S. election and the implications for markets. Now they’re getting answers — and quickly: Donald Trump has secured a second term as president, the Senate majority has flipped to Republicans, and the race for control of the House remains tight. It’s a strong victory for Republicans and a win for equity markets as election uncertainty gets removed.
On election night, U.S. stocks were clear beneficiaries. S&P 500® futures rose as votes were being tallied, as did contracts tied to the Russell 2000 Index, the benchmark of small-cap U.S. companies. The positive momentum spread globally, with select ex U.S. markets also rising as the election outcome crystalized.
Trump is viewed as supporting lower corporate tax rates, deregulation, and industrial policies that favor domestic growth, all of which could provide more stimulus to the U.S. economy and benefit risk assets. These policies could also lead to a stronger dollar, which would be a boon for U.S. small-cap firms with a domestic focus. During the 2016 election, the S&P 500 Index gained nearly 5% from the day before the presidential election through the end of the year in what became known as the Trump rally.1 We expect a similar trend could play out this time around, too.
Implications for markets
Longer term, though, history shows equity markets are more likely to be indifferent to whichever party is in power. A Republican-led White House and Congress has been just as likely to see positive equity returns as a Democrat-led or divided government (Figure 1). That’s because over the long term, what tends to matter most for stock returns are not elections but factors such as corporate earnings, economic growth, and interest rates.
Figure 1: S&P 500 returns based on party control (1937-2024)
Source: Janus Henderson Investors, as of 5 November 2024. Market performance based on S&P 500 Index for the period 1937-2024. Party control designated in the calendar year following elections. Unified government indicates that the party of the incumbent president also controls both houses of Congress. Divided government indicates that the party of the incumbent president does not control both houses of Congress. Past performance does not predict future returns.
The good news on that front: All have been trending positively in the U.S. In the third quarter, the U.S. economy grew at an annual rate of 2.8%, continuing a more-than two-year run of expansion.2 In September, the Federal Reserve kicked off a rate-cutting cycle that could continue into next year should inflation remain contained. And earnings for the S&P 500 are projected to rise ~15% in 2025, up from an estimated 9% for 2024.3
Next steps for investors
That’s not to say the election is inconsequential. We will get the first measure of the new government early next year, when lawmakers must agree to raise the debt limit (the total amount of debt the U.S. is allowed to accrue, as determined by Congress) or risk the country defaulting on its obligations. Meanwhile, the 2017 Tax Cuts and Jobs Act — which was signed into law under Trump and reduced tax rates for individuals and corporations — is set to expire by the end of 2025.
To that end, we could see bouts of volatility if a Republican mandate results in extreme measures. Trump, for example, has proposed not only extending the 2017 tax cuts but adding to them, which could exacerbate an already ballooning federal deficit. He has also promised to impose tariffs of as much as 60% on imports, which could work to fan inflation and lift Treasury yields. And markets that could be on the losing end of trade policies, such as China, could weaken.
We think the reality will be nuanced. For example, while fears exist about the impact of tariffs on non-U.S. markets, in aggregate, we believe they are overblown as they relate to Europe. We also think a strong dollar is generally quite positive for European and Japanese exporters. We covered other potential implications earlier this year, highlighting that areas such as financials might get less stringent regulatory oversight under Republican leadership and that a Trump administration could walk back tax credits for wind, solar, and electric vehicles.
Still, policy doesn’t always match campaign rhetoric, and even among Republicans, there are divisions on key issues. As such, we’d encourage investors to stay focused on bigger themes that have proven to be major drivers of markets lately. These include innovation in healthcare, productivity growth from artificial intelligence, and the rise of new manufacturing hubs in emerging markets. Ultimately, these and other trends, which look set to play out for years to come, could have more influence over which stocks outperform over the long term than any one election.
1 Bloomberg, from 8 November 2016 to 30 December 2016.
2 Bureau of Economic Analysis, U.S. Department of Commerce, as of 30 October 2024.
3 FactSet, as of 1 November 2024.
Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs.
S&P 500® Index reflects U.S. large-cap equity performance and represents broad U.S. equity market performance.
Risk assets: Financial securities that may be subject to significant price movements (ie. carrying a greater degree of risk). Examples include equities, commodities, property lower-quality bonds or some currencies.
Russell 2000® Growth Index reflects the performance of U.S. small-cap equities with higher price-to-book ratios and higher forecasted growth values.
Treasuries/US Treasury securities: Debt obligations issued by the US government. With government bonds, the investor is a creditor of the government. Treasury Bills and US Government Bonds are guaranteed by the full faith and credit of the United States government. They are generally considered to be free of credit risk and typically carry lower yields than other securities.
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
IMPORTANT INFORMATION
Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.
Ex U.S. securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Financials industries can be significantly affected by extensive government regulation, subject to relatively rapid change due to increasingly blurred distinctions between service segments, and significantly affected by availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition.
Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.
Industrial industries can be significantly affected by general economic trends, changes in consumer sentiment, commodity prices, government regulation, import controls, and worldwide competition, and can be subject to liability for environmental damage and safety.
Smaller capitalization securities may be less stable and more susceptible to adverse developments, and may be more volatile and less liquid than larger capitalization securities.
Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance does not predict future returns.
All opinions and estimates in this information are subject to change without notice and are the views of the author at the time of publication. Janus Henderson is not under any obligation to update this information to the extent that it is or becomes out of date or incorrect. The information herein shall not in any way constitute advice or an invitation to invest. It is solely for information purposes and subject to change without notice. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Whilst Janus Henderson believe that the information is correct at the date of publication, no warranty or representation is given to this effect and no responsibility can be accepted by Janus Henderson to any end users for any action taken on the basis of this information.
6 minute read
Key takeaways:
- The U.S. election has avoided a drawn-out vote count for the presidency, eliminating uncertainty for markets amid a big win for Republicans.
- U.S. stocks rallied on the prospect of pro-growth Republican policies. History shows, though, that over the long term, equity performance has been indifferent to election outcomes.
- More important are factors such as earnings growth and interest rates, which are trending positive through the end of 2024 and should be what investors focus on, in our view.