AOR Update: Election implications for US equities

The investment outlook anticipates a Republican sweep, with potential impacts similar to Trump's 2016 victory, favoring value, small-cap, and cyclical stocks, although less pronounced due to a mature economic environment. A second Trump administration could enhance corporate profits through favorable tax policies, lighter regulation, and increased small business optimism, offsetting challenges from higher tariffs, bond yields, and reduced immigration. The resilient economy, supported by pro-growth policies, is expected to benefit equity investors, who have historically thrived as long as recessions were avoided.

Trump's pro-business stance may invigorate capital spending, mergers and acquisitions, and other investments. The National Federation of Independent Business Small Business Optimism Index's significant rise post-2016 election exemplifies such potential. However, Trump's agenda poses risks, particularly from increased tariffs and rising interest rates, with the 10-year US Treasury yield climbing post-election. The balance between stronger corporate profits and valuation risks from higher interest rates will be pivotal for market dynamics.

The market's leadership rotation, favoring value over growth, small-cap over large-cap, and cyclicals over defensives, is likely to persist. The Federal Reserve's recent steps to normalize interest rates bolster the likelihood of a soft economic landing, with third-quarter GDP growth aligning with previous averages. The ClearBridge Recession Risk Dashboard's expansionary signal further supports economic optimism. Historically, equities perform well under both parties, with recessions being the primary threat to returns. Given the low recession risk, robust US equity performance is anticipated during Trump's second term.