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A Biden presidency will likely usher in increased tax rates and regulatory oversight, UBS said.
It's unlikely that corporate tax rates will increase, but marginal taxes could creep back to levels prior to the Tax Cuts and Jobs Act, which is set to expire in 2025.
Biden has been on a mission to crack down on big corporations with a series of antitrust investigations against Nvidia, OpenAI, and Live Nation, among others. If he wins reelection, Big Tech and other large businesses will continue to face heightened regulatory scrutiny.
For equities, the renewable-energy sector would benefit from continued government support. But overall, UBS predicts minimal disruption to the market. With a divided Congress, Biden must rely on executive orders to carry out much of his agenda, limiting potential domestic policy changes. Overseas, Biden's strategy of maintaining existing alliances and trade agreements should create a positive environment for the US dollar.
Trump has built his campaign around tax cuts, less regulation, and tariffs. A Trump presidency combined with a Republican Congress would mean an extension of the current lower marginal tax rates, the bank said.
A Republican administration would also pave the way for a more active M&A market, which has been sluggish for the last year. "There's been this sort of wet blanket on M&A activity because of the antitrust environment we're in," said UBS Head of US Equities David Lefkowtiz.
Overall, UBS sees a slight positive market impact in this scenario, with a boost to fossil fuels. However, higher tariffs would hurt the consumer discretionary, industrials, and information technology sectors. The bank also predicts that the national debt would rise higher under a unified Republican government.
While the political environment is fraught with polarization, a few aspects of the market will remain relatively unchanged regardless of the election winner.
Federal policy is likely to stay the same despite Trump's purported plans to reduce the independence of the Fed.
"There are checks, there are statutory obstacles to this," said Tom McLoughlin, UBS's head of fixed income and municipal securities. "We basically try to remind investors that, you know, this is campaign season. The Fed is often the punching bag for candidates from both parties." This means that interest rates or any potential rate cuts won't fluctuate depending on the election winner.
Additionally, Big Tech will be scrutinized, regardless of who's in office. "I think the one thing that unifies the Republicans and Democrats is that nobody likes tech, maybe for different reasons," Lefkowitz said. While antitrust regulation will likely ease under Trump, he's hardly a Big Tech supporter: Trump sued Facebook, Google, and Twitter (now X) in 2021. The large market shares of Big Tech companies are likely to draw the attention of politicians and regulators across party lines.
UBS outlines three strategies for managing your portfolio for investors wondering how to invest in a volatile political environment.
Regarding equities, the bank is bullish on financial services, which it expects to perform well regardless of the election winner. UBS predicts that financial services will benefit from decreased regulation under a Trump administration and little to no downside if Biden wins. With falling interest rates, loan demand will pick up and boost banks.
Investors should also move out of cash. Although cash is a popular holding in a high-interest-rate environment, the Fed is likely to cut sometime before the end of the year, regardless of who is in office. The market anticipates two 25-basis-point cuts by the end of 2024. Parking money in cash will expose investors to volatility as interest rates decrease.
Leslie Falconio, the head of taxable fixed income strategy, predicts that the yield curve will start steepening by the end of this year. As this happens, investors should withdraw from money market funds and invest in five, seven, and 10-year securities along the curve.
Lastly, UBS recommends investing in gold as an election risk-management asset. Adding gold to your portfolio decreases your exposure to inflation and provides protection in case of economic uncertainty, as the price of gold is less reactive to stock-market declines. It's an especially good investment in this environment, as UBS sees many drivers for gold-price appreciation. Around the world, gold demand is increasing as 29% of central banks are planning to buy over the next 12 months, according to the World Gold Council. Geopolitical conflict, inflation, and central bank activities all boost gold prices.