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What are the possible outcomes?  
Almost four years have passed since Donald Trump defied all expectations at the start of his presidential election campaign and was declared the 45th President of the United States. On 3 November 2020, the US will once again go to the polls.

As a large part of the electorate is expected to vote by mail-in ballots due to the pandemic, and given the contentious nature of the election, it could well be that we will not know who will be the next US President on the night of 3 November 2020.

While much emphasis is placed on who will become the president, the Congressional elections are equally important for assessing the potential policy impact. The House of Representatives is likely to remain in the hands of the Democrats, while the Senate is set to be a much closer contest.

Three of the most likely scenarios are as follows: 

  • Democratic sweep: Biden wins the presidency, Democrats defend the House and win the Senate        
  • Biden with split Congress: Biden wins the presidency, Democrats defend the House, Republicans defend the Senate             
  • Status quo: Trump remains the president, Democrats defend the House, Republicans defend the Senate

A fourth scenario where Trump wins a second term, but has to govern alongside a Democrat-controlled Congress, promises political dynamite and is the most unpredictable in terms of future policies.

Of the possible scenarios, we believe that the overall economic impact would be greatest in the case of a Democratic sweep.

What’s in store for the equity markets once the election is over?
As can be seen in the chart, in the year after a presidential election when the incumbent president was re-elected or when a new president from the opposing party was elected, the difference between the average annual return of the S&P 500 index was historically relatively small. In fact, while the elected president’s policies certainly play a part, there are many other factors that drive equity markets. Looking back at the years when the S&P 500 index achieved a positive return since 1928, it seems that EPS growth was a far more influential factor than the political party in power, implying that profits are more relevant than politics when it comes to equity returns.

What should investors do?  

  • In our view, a Biden victory would only have a limited impact on equity markets and no impact on our 12-month target for the S&P 500 and our earnings forecast for 2021. So we remain constructive on equities and believe that investors should stay the course and not be unsettled by what is sure to be intensive news coverage in the run-up to the elections.
  • However, we would note that there are segments that should perform well irrespective of who makes it into the White House, in our view. These include industrial companies building 21st century infrastructure and companies driving energy transition.
  • Industrial stocks should perform well going forward for a number of reasons, including structural trends such as automation and clean energy as well as the huge fiscal spending in support of economies as they grapple with the Covid-19 crisis. Furthermore, irrespective of the outcome of the US presidential election, the industrial sector should benefit as both Biden and Trump have announced plans for massive investments in US infrastructure.
  • Energy transition is in full swing, with various US coal plants having closed down earlier this year due to low gas prices and cost competitive, unsubsidised renewables undercutting their business models. Biden has announced an ambitious plan of net-zero emissions in the US by 2050, so the clean energy segment would likely benefit particularly from a Biden presidency.

The US remains a deeply polarised country, particularly in terms of important economic issues like the tax system, public healthcare and climate change, and the coronavirus crisis has only served to accentuate this gap further. One thing is assured and that is that the result of the upcoming presidential and Congressional elections will determine the path of US political priorities for years to come.

Crucially, the result will not only impact the future of the US, but also that of the rest of the world.