Update on US elections

What will Trump 2.0 mean?

Donald Trump is back

Donald Trump heads back to the White House as the 47^th President, with an increased likelihood of a Republican sweep. Yesterday (6 November), market reactions were strong, with US stocks hitting all-time highs, 10Y bond yields jumping to 4.5%, and the dollar surging against most currencies.

The impact of his programme on the US economy and the rest of the world is still uncertain and will depend on whether his party also wins the House of Representatives.

For the time being, the US economy is doing well: Unemployment is barely above 4%, growth is close to 3% and the consumer price deflator is almost back to 2%. However, the implementation of Mr Trump's programme -- which includes relatively strong measures on trade policy, immigration, tax cuts, deregulation, etc -- could cause the US economy to deviate from this trajectory.

But it’s too early to know the extent of this deviation. Firstly, because the colour of the House of Representatives itself is still unknown. Secondly, we do not know how quickly these measures will be implemented. And lastly, because none of them has yet been precisely defined. Will tariffs be raised to 60% for China and 10% for the rest of the world, or will they be increased by an additional 60% for China and 10% for the rest of the world? Will free trade zones be spared? How will the rest of the world react? Uncertainty also hangs over measures on immigration, tax cuts on tips and on overtime.

Trump 2.0 : soft or Hard ?

At this stage, it is convenient to continue to envisage two scenarios:

• A relatively ‘moderate’ one – Soft Trump - which leads the economy to deviate relatively little from its current trajectory. Supportive measures directed to the low-to-middle class would compensate the effect of tariffs hikes. Activity would continue to grow solidly, above 2.5% in 2025. In this environment though, inflation would be higher and lead the US Federal Reserve to pause its monetary policy easing in the course of 2025.
• A more disruptive scenario - Hard Trump - cannot however be ruled out. In this scenario, the President rapidly implements all the measures he has promised, despite their sometimes-extreme nature. From next year, for example, not only would immigration be curbed, but 1 million illegal migrants would be deported. Tariff hikes would lead to a full-blown trade war, inflation would be pushed above 4%, the unemployment rate would fall below 4%, forcing the Federal Reserve to raise rates and the economy would eventually dip into recession in 2026.

US markets are likely to continue to outperform the rest of the world.

The fundamental context should remain more constructive for US risky assets, particularly in case of Soft Trump. On the bond front, US yields have already risen sharply since mid-September, driven by stronger-than-expected economic activity and the growing likelihood of Trump’s election. In the Soft Trump scenario, however, rates would remain contained in a range of 4.20% to 4.50% avoiding broader market disruptions. The dollar would remain strong.

Our allocation remains broadly unchanged with a preference for US equities where growth is still resilient. We retain our exposure to technology stocks, but also to small-and mid-caps and to the financial sector areas which benefit from tax cuts and deregulation. We also maintain our long position in the US dollar.

Regarding Eurozone equities, we remain negative for fundamental reasons, and considering that the election of Donald Trump poses additional downside risks to the region.

Our exposure to emerging markets remains more uncertain, and will evolve. It will depend on the measures taken by the new American administration, their sequencing, and on any additional China stimulus.

European government bonds are still an attractive investment following the recent uptick in yields as they offer carry and a hedge in a multi-asset portfolio. We would keep an overweight on European duration as the economy is already facing some downside risks while remaining cautious on US duration.

Credit markets have already rallied and we prefer to be neutral. Even if companies will enjoy lower taxation, rate volatility could trigger a reversal of the current technical support. European credit would face more headwinds, essentially through export-driven manufacturing sectors.

The Hard Trump scenario outlined above should initially be negative across all asset classes, with both stocks and bonds declining. If this leads to  weaker activity, government bonds could later resume their usual role as a buffer. Between these two scenarios, numerous intermediate possibilities could introduce volatility in markets. Over the coming days and weeks, two key variables to monitor will be U.S. rates and the  trajectory of the dollar.