US elections: A referendum on Trump

The 2020 coronavirus crisis is turning out to be a game changer for the US November elections, heavily affecting President Trump’s chances to win re-election.

Thomas Costerg, US Economist & Jacques Henry, Cross-Asset Team Leader

US elections: A referendum on Trump

President Donald Trump is facing sharp criticism for his management of the epidemic, which is far from being under control, especially in the South. Meanwhile, the economy – Trump’s signature political theme – is taking a big hit despite significant rescue packages.

An average of national polls shows Democratic candidate and former vice president Joe Biden leading Trump by around eight points; the gap is also widening in crucial swing states such as Florida, where Biden leads by around six points according to Real Clear Politics. At this juncture, Trump is facing an uphill battle to be re-elected.

Winning control of the Senate is crucial for advancing the Democrats’ economic policies. While Biden is well ahead in opinion polls for the presidential election, the Senate is a different kettle of fish. Even if the Democrats were to win control, their majority would likely be slim.

Policy wise, while Joe Biden and the Democrats are insisting on partially reversing the Trump tax cuts of December 2017, we think that if elected the Democrats would stay pragmatic and focus their early efforts on re-booting the economy through fiscal stimulus.

The US-China relationship may remain fraught, whoever wins in November. While Biden may downplay trade, he could focus more on geopolitical concerns.

Whoever wins the November elections, it seems likely that a form of Modern Monetary Theory ‘light’ involving a combination of loose monetary and fiscal policy will continue to influence policy making for the foreseeable future.

For equity markets, the US elections are increasingly being seen as a source of volatility. An increase in the corporate tax rate from 21% to 28% could potentially shave at least a third off of 2021 earnings growth.

US tech giants turned out to be the big winner of covid-19. They now account for around a quarter of the S&P 500’s capitalisation but only pay 13% of total taxes. Their profitability will likely decline if taxes are increased.

Compared to the tech giants, the healthcare sector, which has also benefited from the covid-19 crisis, is trading at relatively attractive valuations. In addition, reforms of the US health system have slid down the political agenda (and the more extreme proposals on the left of the Democratic party have faded from view). In general, efforts to avoid derailing the economy may mean that whoever wins the November election may lighten pressure on sectors such as oil & gas.

Dividends paid by S&P 500 companies are now expected to decrease to around USD 400bn this year. After a dynamic Q1 2020, buybacks are also expected to decline to about USD 400bn this year. A corporate tax increase and potential regulatory restrictions could further curtail share buybacks next year.

Read full report here

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