Wei Li – Global Chief Investment Strategist of BlackRock Investment Institute together with Catherine Kress –
Head of Geopolitical Research and Christian Olinger – Portfolio Strategist, all forming part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Key Points
Policy implications: The U.S. election outlook is coming into focus with election day just weeks out. We assess the impact of likely policy differences on the economy and sectors.
Market backdrop: U.S. stocks hit new highs last week after the Federal Reserve’s hefty rate cut. We think the Fed’s mixed messages after the decision could stoke future volatility.
Week ahead: We watch U.S. core PCE data for August out this week. We think inflation will prove sticky and could surprise the Fed again as it did earlier in the year.
The U.S. presidential election has undergone a reset in recent months, with Vice President Kamala Harris replacing President Joe Biden atop the Democratic ticket. Most national and battleground state polls are showing a close race between Harris and former President Donald Trump. Policy differences are becoming sharper – yet control of Congress will be key for implementation. We stay focused on areas such as tax, energy, trade and regulation for the investment implications.
The U.S. presidential election outlook underwent a reset after Biden’s decision to drop out and endorse Harris as the Democratic nominee for president. Since then and following the debate this month, Harris has taken a slight lead in most national polls, according to RealClearPolitics data. See the chart. The race appears to be close in key battleground states where Harris has closed Trump’s lead and made the race more competitive. Harris’ policy views have mostly been consistent with Biden’s – though she has outlined a number of new proposals including expanding the child tax credit and offering financial support for homebuyers. Yet both candidates could face constraints on enacting their agenda – especially on fiscal policy – if their party doesn’t hold unified control of Congress. This comes as federal regulation may face new limits after recent Supreme Court decisions.
Neither party has prioritized tackling the budget deficit. Harris has largely adopted Biden’s tax plan, such as higher corporate taxes, with some key differences like the capital gains tax on wealthy households. Trump plans to fully extend the provisions of the Tax Cuts and Jobs Act (TCJA) expiring in 2025 and propose new cuts, including to corporate taxes. Trump says he will boost revenues by levying tariffs on a broad range of U.S. imports. Control of Congress will dictate the size and scope of TCJA extensions and any government spending cuts. Deficits are one reason we see inflation staying above pre-pandemic levels.
Sectoral policy impact
Energy would be a key policy priority of either administration, including bipartisan agreement on the need for permitting reform to build energy infrastructure. U.S. oil and gas output hit new highs under Biden, supporting the energy sector. A Harris administration would mean a continuation of current energy policies, including support for clean energy. Under a Trump administration, Republicans would look to boost energy production and scale back implementation of the Inflation Reduction Act, like credits for electric vehicles. Yet we think the act is unlikely to be repealed entirely.
We see trade as another area with macro implications. Both candidates are likely to pursue additional export controls on national security grounds, especially in advanced technology. On tariffs, Harris is likely to maintain the status quo, with the potential for more targeted tariffs against China. Trump’s proposed 60% tariffs on China and 10-20% broad tariffs would be a major escalation. Increased protectionism under either administration reinforces geopolitical and economic fragmentation, one of the structural factors we see keeping inflation higher medium term. Reduced legal immigration under either administration – though it is a centerpiece of Trump’s campaign – could also have implications on the labor market.
One area highly dependent on the election outcome is regulation. A Trump win could mean some deregulation, including the rolling back of regulation for banking in particular. Big tech may still be a target for bipartisan antitrust measures. By contrast, a Harris win could reshape the healthcare landscape through expanded Medicare or drug price caps.
Our bottom line
Policy differences between Harris and Trump are sharpening. Control of Congress will be key for assessing how their policy agendas could be implemented. We see potential impacts in sectors like energy, tech, healthcare and financials.
Market backdrop
U.S. stocks struck new all-time highs last week, with small cap stocks leading the way. Stocks regained their footing after the Fed delivered a larger 50-basis point rate cut. We think the Fed’s mixed messages – speaking of solid growth and many more rate cuts to come – could mean abrupt policy changes and volatility. U.S. 10-year Treasury yields inched up to around 3.75% after reaching 15-month lows. The curve between two- and 10-year yields hit its steepest levels since mid-2022.
We watch U.S. core PCE data, the Federal Reserve’s preferred measure of inflation, for August out this week. The Fed’s mixed messages after its 50-basis point policy rate cut last week show that it risks being surprised again if inflation proves sticky, as it was at the start of the year. The hotter-than-expected CPI for August was a reminder that inflation pressures remain, and wage gains have not eased enough for inflation to stay near the Fed’s 2% target.
Week Ahead
Sept. 23: Global flash PMIs
Sept. 24: U.S. consumer confidence
Sept. 26: U.S. durable goods
Sept. 27: U.S. PCE
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