In light of the upcoming November elections in the United States, what do you see as the potential impact on the stock market, particularly if the Republican Party secures a sweeping victory? Could we see a return of Trump to the presidency and the enactment of tariffs that might provoke global retaliation?
According to a report from Dow Jones, UBS Group’s team of strategists has been modeling various scenarios and has made projections regarding the S&P 500 index based on six possible outcomes:
1. **Divided Government with Soft Economic Landing**
Whether Trump or his Democratic counterpart, Kamala Harris, emerges victorious, the most likely scenario suggests a divided federal government. This would coincide with the Federal Reserve achieving a soft landing for the economy, avoiding significant recession. If this scenario plays out, UBS forecasts that the S&P 500 could rise from its current level of 5,780 points to 5,850 by the end of this year, progressing further to 6,400 points by 2025 and reaching around 6,850 points in 2026—an outcome most favorable for the stock market.
2. **Republican Control with Tariffs Leading to Retaliation**
Conversely, if Republicans secure control of both houses of Congress and the White House, with Trump implementing tariffs that could trigger global backlash, there’s a possibility of a significant market drop. In this extreme “red tide” scenario, the S&P 500 could plummet to 5,200 points in 2025, with a slight recovery to 5,650 points in 2026.
3. **Red Tide with Tax Cuts and Deregulation, but No Tariffs**
In a scenario where there’s a continuation of the red tide, with Trump 2.0 pursuing tax cuts and deregulation without imposing tariffs, the outlook improves. Here, the S&P 500 could rise to 6,375 points in 2025 and approach 6,775 points in 2026, although concerns about potentially widening budget deficits may still weigh on performance relative to the first scenario.
4. **Democratic Sweeping Victory**
If the Democrats achieve a significant victory, controlling the White House and both chambers of Congress, UBS predicts that the “blue tide” might not provide as much momentum for the stock market as a red wave. In this case, the S&P 500 may end 2024 at around 5,750 points, with further growth to 6,000 points in 2025 and 6,475 points by 2026.
5. **Persistent Inflation Limiting Fed Rate Cuts**
If inflation remains stubbornly high, this could restrict the Federal Reserve and other central banks from significantly lowering interest rates, leading UBS to suggest that the stock market may stagnate over the next two years.
6. **Economic Recession**
The most pessimistic scenario involves a recession, which could see the S&P 500 slump to 4,325 points in 2025, with only a marginal recovery to about 5,175 points in 2026.
Based on the analysis provided, it appears that stock market investors may find the most hope in a scenario leading to a divided federal government following the elections.
