The "Trump Trade," a bet that the former president will regain the White House as the GOP takes control of Congress, helped push the S&P 500 to a record high in July but steadily unwound after Vice President Kamala Harris replaced her boss at the top of the ticket.
Yet after Tuesday's pivotal debate, a clean-sweep 2024 election still looks just as likely as a divided government next year, and perhaps even more so. What's changed is that Harris has a realistic chance at a sweeping victory as well. And Wall Street has real concern about what one-party rule by either Democrats or Republicans might mean for the U.S. economy and stock market.
Investment firms still regard a blue sweep as something of a long shot. UBS Global Wealth Management upped its odds of a Harris victory to 55% on Aug. 16. But it only sees a 15% chance that she'll get a Democratic-controlled Congress vs. 35% odds that Donald Trump will win with a GOP Congress. Yet the Polymarket prediction site suggests the race could go any of three ways: a Republican sweep (33% odds), Harris wins but the GOP takes the Senate (28%) and a Democratic sweep (21%).
The upshot: We may be headed for an election 2024 cliffhanger with widely divergent outcomes for investors — and the economy.
2024 Election Fallout Could Swing S&P 500 Earnings, Rate Cuts
The most obvious difference is tax policy. Trump plans to cut the corporate income tax rate to as low as 15%, while Harris wants to raise it to 28%. That alone could mean a double-digit percentage-point swing in S&P 500 earnings.
On top of that, Harris confirmed Wednesday that she backs a quadrupling of a 1% tax on stock buybacks. An IBD analysis finds that would wipe out the incentive for companies like Apple to buy back their shares to boost earnings.
The difference between a clean-sweep election and divided government also could be stark. More stimulative fiscal policies produced by one-party rule could produce faster near-term growth but with higher inflation, bloated deficits and fewer Federal Reserve rate cuts than under divided government. That could hurt longer-term growth.
UBS strategists say a blue sweep would likely have a "slightly negative impact" on the S&P 500. Meanwhile, "equity markets would likely cheer" the lower taxes and lighter regulation prescribed by a second Trump administration.
Once Trump's more Wall Street-friendly policies are "partially offset by concerns about the costs and inflation impacts of higher tariffs and trade wars," UBS strategists expect just a "slightly positive" impact. However, some other firms think trade frictions and deportations of unauthorized immigrants might make Trump's policies an outright drag on GDP.
UBS expects that a Harris victory with a GOP Senate would have only a "muted impact on financial markets," with little chance of increases in corporate or capital gains taxes. Further, recent Supreme Court decisions should restrain the regulatory state to a significant degree. UBS strategists say those rulings "will likely curtail the ability of executive branch agencies to interpret federal statutes."
Election 2024: How Wall Street, Silicon Valley Will Feel The Impact
Stock Market Fares Better With Divided Government
History shows that a divided government has tended to produce stronger stock market returns than one-party control. Investment strategist Ed Yardeni sees reason why that may hold true for the current election.
"The biggest inflationary risk in 2025 is that either the Democrats or the Republicans take it all," Yardeni wrote in an Aug. 27 note.
As the S&P 500 made a run back near record highs at the end of August, Yardeni told IBD that markets might be down if investors knew for sure that a clean sweep for either party was coming. "The program of both parties, as they're describing them without any opposition, would widen the deficit even further and stimulate inflation. I think the markets are betting on gridlock, which is what I'm betting on."
The coming fiscal cliff amplifies the stakes of the 2024 election. Most of the 2017 Trump tax cuts are set to expire at the end of 2025. They would cost $4 trillion to extend over the next decade, according to the Committee for a Responsible Federal Budget. Unless revenue from new tariffs helps shrink the fiscal gap, the tax cut extension could balloon the already unwieldy budget deficit beyond 7% of GDP. That could risk a bond-market backlash, pushing up the 10-year Treasury yield and hitting stock prices along with demand for new mortgages and car loans.
Harris Vs. Trump Economy: Split Government, Tighter Budgets?
Divided government typically delivers more austere budgets, as when congressional Republicans turned into fiscal hawks under Presidents Clinton and Obama from 1995 to 2000 and 2011 to 2016. Contractionary fiscal policy might give the Fed even more reason to bring down rates to secure an economic soft landing.
The U.S. could be in for a replay of the 2013 fiscal cliff, when the 2001 and 2003 Bush tax cuts were set to expire. Obama was forced to let his 2 percentage point payroll tax cut expire, while the House GOP accepted a return of the top income-tax bracket to 39.6% from 35%.
A sharp fiscal contraction followed the 2012 election's split outcome. The deficit went from 6.7% of GDP in 2012 to 2.8% in 2014. Yet it proved to be no restraint for the stock market. The S&P 500 soared 41% in the two years through Election Day 2014, helped by ultra-easy Fed policy.
Dating back to 1958, elections with divided outcomes have averaged two-year S&P 500 gains of 20.4%. Elections delivering one-party rule have generated more middling returns, with an average two-year S&P 500 advance of 14.2%.
Yet the track record of divided government for S&P 500 returns is at least partly a function of circumstance.
Likely the biggest catalyst for the 46% rally since Nov. 8, 2022, didn't come when the GOP regained the House that Election Day. The ChatGPT launch three weeks later is what ignited the artificial intelligence-fueled bull market.
The worst returns — a two-year average of 9.6% — have come under unified Republican governance. But the sample is tiny: just four two-year spans. Further, one can't really blame President George W. Bush and the GOP Congress elected in November 2000 for the fizzling of the dot-com bubble in March 2000.
Election 2024: Trump Tax Cuts
Trump's first two years in office with a GOP Congress produced a strong 29% advance for the S&P 500, fueled by passage of the Tax Cuts and Jobs Act, which cut the statutory corporate tax rate to 21% from 35% and reduced individual income tax rates. But Republicans' failed bid to repeal the Affordable Care Act likely led them to defeat in the 2018 midterms.
A second Trump term could follow a similar playbook, aiming to undo his predecessor's crowning achievement. Trump has said he wants to repeal the Inflation Reduction Act and its $400 billion in subsidies for battery manufacturing, electric vehicles, wind turbines and solar energy. Yet 18 House GOP lawmakers went on record in August opposing such a move.
President Biden's decision to bow out of the 2024 election probably saved his signature legislation. The current race is likely to produce a "closely divided House and Senate," with no majority for IRA repeal, Goldman Sachs political economist Alec Phillips wrote last month.
That means there's no obvious piggy bank for Trump to pay for new tax cuts, much less renew his old ones. An analysis by the University of Pennsylvania's Wharton School budget analysis center finds that Trump's plans would add $4.1 trillion to the 10-year primary budget deficit. That figure excludes both additional debt-service costs, which would widen deficits, and revenue from tariffs, which could stem the red ink.
Beyond preserving existing tax policy, Trump would eliminate taxes on Social Security benefits at a cost of $1.2 trillion. Lowering the corporate tax rate to 15% would cost $600 billion.
Soft Hiring Bolsters Case For Big Fed Rate Cut
Tariffs, Immigration Threats Mulled
Penn Wharton didn't estimate the impact of Trump's plan to impose a 10% tariff on all imports and up to 60% on Chinese goods. But Nomura economists estimated in a Sept. 3 analysis that Trump tariffs would raise between $200 billion and $300 billion in revenue per year by 2026.
Yet Nomura expects "notably higher" inflation and a larger fiscal deficit under Trump and a GOP Congress. That could lead the Fed to cut rates by a half percentage point less next year than under a status-quo election, and higher rates would weigh on economic growth.
Taking Trump's tariff threats at face value and assuming deportation of as many as 1 million unauthorized immigrants per year, Moody's Analytics sees those policies, along with new tax cuts, boosting inflation rather than growth. Moody's expects GDP to grow just 1.3% a year over the next four years in a red sweep. That's vs. 2.1% if Harris wins but the GOP controls the Senate.
Yet there are plenty of wild cards. Nomura noted that surveyed investors aren't so sure that Trump would follow through on mass deportations. They also expect "Trump's bark on tariffs to be worse than his bite." At the Republican National Convention, Trump signaled that he's open to deal making. While threatening to slap 100% to 200% tariffs on Chinese EVs made in Mexico, Trump suggested that Chinese manufacturers build EVs in the U.S. instead.
2024 Election: Kamala Harris Tax Plan
The Penn Wharton budget analysis of blue-sweep policies came before Harris fleshed out her tax plan on Sept. 3, but still helps to understand it. Perhaps the key finding is that the $1.2 trillion in corporate tax hikes might hurt. Wharton finds that GDP would be 1.3% smaller in 2034 than under current policies, amid less investment in productive capital. It also sees wider deficits due to $2.2 trillion in tax benefits for moderate-income families.
Moody's says the effective corporate tax rate would jump from around 12% to above 19%. That would put the U.S. near the top among market-based OECD countries.
Another key difference is the distributional impact. The bottom 20% of households would get an initial 18% income boost in a Harris sweep, Penn Wharton finds. Yet the conservative Tax Foundation's analysis of the White House's 2025 blueprint, much of which Harris embraced Wednesday, suggests a weaker economy would erode lower earners' income gains over time. Under Trump, everyone would get a tax cut, though the bottom quintile would see just a 1.4% increase in income.
In assessing Harris' policies, Moody's Analytics attributed to her the full $5 trillion of tax hikes in Biden's 2025 budget proposal. Moody's figures that all that relative fiscal discipline would lower interest rates and even unemployment, after-tax corporate profits would stagnate over the next four years.
What's On Tap: Apple To Unveil iPhone 16; Oracle, Adobe Earnings Due
Tax On Stock Buybacks
Earnings per share would take an extra hit from Harris' 2024 election proposal to quadruple an excise tax on stock buybacks to 4%. Consider the implications for Apple, which repurchased $76.6 billion of its shares in fiscal 2023. With no excise tax, those stock buybacks would have raised EPS by 3%. With the 1% stock buyback tax under the Inflation Reduction Act, Apple's buyback provided a slimmer 2.3% lift to EPS. However, the 4% buyback tax would have raised EPS by just 0.03%.
If Harris' proposal ever passed, buying back shares would be impossible to defend vs. paying out excess cash to shareholders via higher dividends.
The most unrealistic projection by Moody's Analytics was that the budget deficit would be $250 billion narrower in 2028 under unified Democrat governance than it would be under Harris and a divided Congress. History suggests that divided government is more likely to exercise fiscal discipline. Further, even when Democrats presided over Congress, Biden was unable to raise the 21% corporate tax rate even to 22%, much less 28%.
Harris, in trying to burnish her appeal to moderates, has made a partial break from Biden on taxing capital gains. Biden has backed an effective top rate of 44.6% vs. the current 23.8%. Harris drew the line at 33%. That would include a 28% capital gains tax rate, up from 20% now, and a 5% Medicare surcharge, up from 3.8%.
Harris proposes raising the top marginal income-tax rate to 39.6%. She also favors lowering the threshold at which the estate tax applies and taxing unrealized capital gains for those with a net worth of at least $100 million.
Election 2024: Senate Split
In weighing potential 2024 election outcomes, the key question isn't only whether Democrats can hold the Senate, but what they can pass if they do. Right now, broad tax hikes seem conceivable with centrists Joe Manchin of West Virginia and Kyrsten Sinema of Arizona exiting.
Still, barring an unlikely pickup in Florida or Texas, the best case for Democrats is a 50-50 Senate. That means every Democratic senator would have a veto over every Harris proposal.
With the GOP sure to claim Manchin's seat, Republicans need to win just one of seven competitive races held by Democrats. Everything would have to go just right for Democrats. But, if Harris prevails, that's not totally far-fetched.
Daron Shaw, politics professor at the University of Texas at Austin and co-director of the Fox News Poll, told IBD that a Harris victory in the Electoral College would likely require at least a 3-point margin in the popular vote. That would mean a tail wind for Democratic candidates. But it might not be enough for Montana Sen. Jon Tester to fend off GOP challenger Tim Sheehy.
"My guess is that she'd need a 5-point or greater national win to potentially bring MT into the D's senate column," Shaw wrote in an email.
The latest polling in Montana looks bad for Tester. Sabato's Crystal Ball, a publication from the University of Virginia Center for Politics, just shifted Montana from toss-up to leans Republican. On the other hand, a new poll showed Democrat Debbie Mucarsel-Powell down just a point in Florida to GOP incumbent Sen. Rick Scott.
Abortion ballot initiatives could boost Democratic turnout in Montana, Florida, Arizona and a handful of other states, Shaw said.
"Ballot initiatives do not typically drive turnout in a presidential year," Shaw said. "Yet it's also true that abortion tends to motivate younger voters, who are among the most likely to skip voting."
