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Elections have consequences, but the defeat of the pandemic and subsequent economic recovery will continue to be one of the main market drivers in any election outcome, which bodes well for the equity market over time. That said, a Blue Wave or status quo outcome would likely be modestly better for stocks because it would lead to larger fiscal support relative to a Biden win with a divided Congress, economists at UBS report.

Key quotes

“A Biden administration would emphasize economic recovery with a focus on infrastructure, green initiatives, and potentially healthcare coverage expansion. Trade tensions could also cool, providing an additional boost. This should offset the impact of tighter regulation and higher taxes. We believe industrials, materials and utilities sectors would benefit. The energy sector could lag due to green policies. Financial regulation would likely be fairly limited in scope. For healthcare, uncertainty about the impact of a potential ‘public option’ health insurance plan and drug price cuts could weigh on the sector, but we think the most dire policy outcomes are already priced in and, ultimately, greater healthcare coverage would benefit the sector.”

“In a Biden victory with a divided Congress, equities could have a modestly negative reaction. This constellation might produce the smallest fiscal package if the Senate Republicans opt to block most legislation. Still, industrials and materials could benefit from reduced trade tensions. On the regulatory front, utilities would benefit from green initiatives. However, energy, and, to a much lesser extent, financials, could see some regulatory headwinds. Healthcare stocks would likely react favorably to the prospect of more limited than expected policy changes.”

“In a status quo scenario, policy shifts would likely be fairly small. Fiscal stimulus that supports the recovery would likely come through, but it would be smaller than a Blue Wave outcome. Renewed trade tensions with China are a risk and would have a slightly negative impact on the industrials and materials sectors. Companies in the energy, financials, and healthcare sectors could benefit from a relief rally as some of the policy uncertainty associated with a Biden victory dissipates.”