Key Points

  • We evaluate the possible impacts a “Blue Wave” in the U.S. election could have on the economy and markets.

  • Although campaign proposals do not always result in legislation, there are five key areas targeted for change: taxes, labor, the environment, oil and trade.

  • This potential change in U.S. political leadership could introduce more risk to earnings and market performance of U.S. stocks, and lead to relative outperformance of international markets.

To be clear, we are not forecasting the U.S. election—trying to forecast the markets is hard enough. Examining the market impact of a “Blue Wave” result for the U.S. election (the democratic sweep of the White House and both chambers of Congress) seems prudent for two reasons. For one thing, polls are signaling a rising chance of this election outcome. But, mainly, because out of all the possible outcomes, a “Blue Wave” implies the largest potential changes to the legislative environment for global companies, which could result significant impacts for both domestic and international markets.

Before we dive into this analysis, it is important to remind ourselves that campaign proposals do not always result in legislation. The election outcome, its ability to drive any changes to legislation and the markets’ reaction to those changes is at least three degrees of separation. Investors should consider all the potential variables before making any changes to their portfolios. With this in mind, let’s look at the possibilities and their potential market consequences on global markets in five key areas: taxes, labor, the environment, oil and trade.

Taxes

Although markets typically welcome new spending initiatives, those proposed by democratic candidates are likely to be accompanied by higher corporate taxes. Among other proposed taxes on U.S. based multi-national companies is an increase in the U.S. corporate tax rate from 21% to 28% which could result in the average company seeing after-tax profits fall by 10%, which may put downward pressure on stock prices.