Citi Research analysts led by Scott T. Chronert issued a note on Thursday sharing their initial insights on the potential impact of the upcoming U.S. presidential election on equities.

“Current polling shows a high likelihood of a Biden versus Trump rematch in the 2024 presidential election. Yet, policy platforms are still formative. We argue that historic election comparisons, and first term equity outcomes, may mislead investors,” the analysts wrote.

Instead, a more nuanced analysis of the macroeconomic and fiscal environment leading up to 2025 is essential, Citi notes.

The focus for investors is understandably on the trade policies that could emerge from a Trump administration. However, the analysts highlight the importance of considering the fiscal consequences in 2025 and beyond.

1) ’What Matters to Voters versus Investors?’: Chronert and his team think social policies could play a more decisive role in determining the result of the election, compared to economic policies. Still, the analysts see the effects of social policy on corporate fundamentals as less significant.

“We suspect candidate views on social policies may determine the election outcome. Yet, investors will likely focus on policies more impactful to US equity fundamentals, notably trade, regulatory and tax effects,” they wrote.

2) ‘A Second Biden Term’: Secondly, Citi expects a second Biden term to largely mirror the policy path of his first, assuming a divided Congress with reversed control of the House and Senate.

This scenario suggests that markets might not be taken aback by the continuation of his main policy agendas. Yet, uncertainties loom over 2025 with issues like the debt ceiling, the expiry of individual tax benefits from the Tax Cuts & Jobs Act (TCJA), and potential tax increases complicating Biden's strategy.

Further, there appears to be minimal momentum towards curbing fiscal expenditure, analysts said.

3) ‘Trade What-If’: Citi analysts are currently uncertain about the potential market effects if former President Trump were to win a second term, especially if Republicans secure control of both the House and Senate.

The lack of a clear Trump policy agenda for a second term “and this likely refines after he obtains the official nomination,” they wrote.

“However, our early take is that another Trump presidency would have a much different market impact relative to his first term. Specifically, we anticipate a marked change in the fiscal backdrop, with negative implications for aggregate government spending.”

4) ‘Eye on Fiscal’: Lastly, Both candidates are confronted with a challenging fiscal scenario, strategists noted. Deficits, the debt ceiling, and taxation could collectively influence the fiscal stimulus environment in the post-pandemic era.

“We view the early Trump proposal to impose a 10% baseline tariff and 60% tariff on imports from China as mostly campaign positioning, with little chance of actually occurring.”

Moreover, if such a measure were to be implemented, it could have notably adverse consequences, leading to a cascade of effects that would impact various sectors within the US equity markets.

By Vahid Karaahmetovic