With less than eight weeks until Election Day, the race between Vice President Kamala Harris and former President Donald Trump remains fiercely competitive.
The race, marked by sharp contrasts in policies and styles, is centered on seven key states.
The results in these states, which have been awash with ads and extensive field operations, will likely determine the next occupant of the White House.
One of the main concerns of both voters and investors is the state of the federal budget.
UBS makes it clear that the outcome of this election is unlikely to resolve the current problem of budget imbalance.
Both Republicans and Democrats acknowledge the unsustainability of current public finances, but are divided on how to address the problem.
While Republicans tend to focus on cutting spending, Democrats advocate increasing revenue. Unfortunately, neither approach seems likely to lead to a balanced budget, particularly given the political divisions in Congress.
Beyond budget concerns, fiscal year 2025 budget negotiations and the looming debt ceiling will further complicate matters, regardless of who wins.
The risk of a government shutdown and the reset of the federal debt limit in early 2025 introduce potential financial volatility. Historically, divided governments have struggled to reach consensus on such issues, often resulting in last-minute compromises.
The Federal Reserve’s role in this election year is also under scrutiny. Despite claims that political considerations do not influence monetary policy decisions, UBS notes that the Fed has adjusted interest rates during 11 of the past 12 election cycles.
While these adjustments have not had a definitive impact on the election results, markets will undoubtedly react to any changes in policy.
Recent Supreme Court rulings have also reshaped the regulatory landscape, reducing the power of federal agencies to interpret ambiguous laws.
This could create uncertainty in sectors ranging from health care to energy, as companies explore the possibility of deregulation or greater oversight depending on the election results.
Energy policy is another focal point, especially considering the Inflation Reduction Act (IRA) of 2022, which represents the largest U.S. investment in clean energy.
A Harris administration would likely maintain the IRA provisions, while a Trump administration might seek to scale back or adjust its approach, particularly with respect to electric vehicle incentives.
However, UBS notes that even in a “red sweep” scenario, the IRA is unlikely to be completely reversed due to the growing importance of renewable energy in key Republican districts.
On trade policy, UBS highlights the president’s ability to impose tariffs with few restrictions. Both Harris and Trump are expected to use tariffs as a foreign policy tool, although Trump would likely employ them more broadly.
Tariffs, while effective in certain cases, can have inflationary effects and disrupt global supply chains, creating further challenges for businesses and consumers.
Foreign policy considerations go beyond trade. Questions about the U.S. president’s authority to withdraw from international treaties or deploy military forces without congressional approval are particularly pertinent in this election. While Congress has significant power over treaty negotiations and declarations of war, recent administrations have exercised broad discretion in foreign affairs.
The approach the next president takes on these issues will have far-reaching consequences for global alliances and military engagements.
Domestically, immigration policy is a central issue in the campaign, and Trump has promised a large-scale deportation effort.
While the executive branch has considerable authority in this area, UBS notes that practical challenges such as resource constraints may prevent such an initiative from being fully realized.
The balance of power in Congress will also play a pivotal role in post-election policymaking. Key Senate races in states such as Montana, Ohio and Pennsylvania will determine whether Democrats or Republicans control the upper chamber, while House races in districts Biden won in 2020 remain highly competitive.
A divided Congress could limit the ability of either party to implement significant legislative changes, regardless of who wins the presidency.
The accuracy of polls has been a topic of much debate following the 2016 and 2020 elections, where results deviated from expectations.
UBS acknowledges that while pollsters have made adjustments, public confidence in polls remains low, particularly with Trump on the ticket.
Polling accuracy in midterm elections has been more reliable, but the unique dynamics of a presidential election can present different challenges.
Election security, especially with regard to postal voting, remains a concern. UBS stresses that postal voting is not a new practice and is generally secure, with very few documented cases of fraud.
However, timely delivery of ballots and verification processes will be critical to ensuring a fair and transparent election.
The potential influence of third-party candidates, though historically limited, is another factor UBS takes into account. While prominent third-party candidates such as Ralph Nader and Ross Perot have influenced past elections, Robert F. Kennedy Jr.’s withdrawal from the 2024 race is unlikely to have a significant effect on the outcome.
Also highlighted is a unique feature of the American electoral system, the Electoral College. While the system was designed as a compromise between small and large states, its continued existence is a matter of debate.
If no candidate wins the necessary 270 electoral votes, the election would move to the House of Representatives, where each state delegation would cast a single vote, a scenario that could introduce further complexity to the process.
While elections can cause short-term volatility, long-term trends suggest that political party affiliation does not have a significant impact on market performance.
However, sector-specific outcomes may vary. In the energy sector, a Trump administration would likely favor fossil fuel companies, while a Harris administration might focus on renewable energy initiatives.
The financial services industry could benefit from a Trump presidency due to lighter regulatory oversight, while a Harris administration could impose stricter regulations, particularly in areas such as consumer protection and bank consolidation.
The technology sector will remain at the center of geopolitical tensions, particularly around semiconductor exports. Both candidates are likely to maintain restrictions on technology transfers to China, although the details may differ.
The broader tech industry could see increased volatility, especially in the hardware and semiconductor sectors, as supply chains shift and tariffs are potentially reimposed.
Tax policy is another area of divergence between the candidates. Trump advocates making the 2017 tax cuts permanent and further reducing corporate taxes.
Harris, for her part, supports tax increases on the wealthiest individuals and corporations. The ability to implement these changes will depend largely on the makeup of Congress, as a divided legislature makes meaningful tax reform unlikely.
Finally, UBS addresses concerns about the future of the US dollar. While the Harris administration could introduce policies that weaken the dollar, such as higher taxes and increased government spending, Trump’s trade policies and the possibility of rising deficits could also weaken the dollar in the long term.