UBS Research in a note dated Thursday flagged that the United States might see modest economic and market gains if former President Donald Trump wins a clean sweep in the upcoming election. Analysts highlight several factors that could drive this potential outperformance, including tax cuts, deregulation, and a weaker dollar.
Potential economic policies and impacts
Analysts predict that a Trump administration would likely implement further tax reductions, particularly benefiting corporations, which could enhance profitability and investment. Deregulation efforts are also expected to stimulate business activities by reducing compliance costs, particularly in heavily regulated sectors.
Trump's preference for a weaker dollar is another key factor. UBS points out that while a multilateral accord to weaken the dollar is unlikely, unilateral efforts could still influence currency value. Additionally, Trump’s protectionist trade policies, including tariffs, could impact the competitiveness of U.S. companies relative to international counterparts.
Sector winners and Market reactions
Certain sectors are poised to benefit more than others under a Trump administration. Financials, in particular, are expected to perform well due to less regulation, a steeper yield curve, and increased merger and acquisition activity.
UBS notes that financial stocks surged following Trump’s 2016 election victory and could see similar gains this time around. Cyclical groups, excluding discretionary sectors, are also likely to outperform, along with value stocks and economically sensitive sectors.
Global growth and Trade dynamics
UBS emphasizes that the U.S. economic performance will also depend on global growth and China’s recovery. Regions with high operational leverage, significant trade surpluses to the U.S., and extensive exposure to China, such as Korea, Germany, and Japan, are most at risk from heightened tariffs. Conversely, India and the UK are less vulnerable.
The fiscal policy implications of a Trump sweep suggest that fiscal deficits could exceed 7% of GDP from 2028 onwards, regardless of the government’s composition. “We project fiscal deficits under a red wave to be less than a ½ pp of GDP higher, than under divided government, with deficits exceeding 7% from 2028 onwards, under both scenarios,” analysts said.
Trade policy and Inflation risks
A significant aspect of Trump’s trade policy would involve imposing tariffs. A proposed 60% tariff on China and 10% on the rest of the world would dramatically increase the weighted average tariff rate, potentially reducing demand for tariffed goods and impacting U.S. imports. Historical reactions to tariff announcements have shown adverse effects on the equity market, particularly in export-oriented sectors.