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Economists at Charles Schwab evaluate the possible impacts a “Blue Wave” in the US election could have on the economy and markets.   There are five key areas targeted for change: taxes, labor, the environment, oil and trade. This potential change in US political leadership could introduce more risk to earnings and market performance of US stocks and lead to relative outperformance of international markets.  

Key quotes

“Although markets typically welcome new spending initiatives, those proposed by democratic candidates are likely to be accompanied by higher corporate taxes. Among other proposed taxes on US based multi-national companies is an increase in the U.S. corporate tax rate from 21% to 28% which could result in the average company seeing after-tax profits fall by 10%, which may put downward pressure on stock prices. There is a chance that US stocks may underperform international stocks if it appears that the 2017 tax cuts are likely to be reversed, lowering after-tax profits for US companies, assuming tax rates remain stable elsewhere.”

“One of the democratic party’s priorities emphasizes putting workers before shareholders and restoring labor’s share of national income by strengthening unions and their bargaining rights. […] Europe’s labor costs rose to their highest percentage of GDP in the last 20 years. If the US trend of falling labor share of income reverses, it could act as a drag on the profit growth of US companies relative to their international peers.” 

“If the Senate remains in Republican control, the US embracing major climate change legislation in parallel with Europe’s New Green Deal – including climate-related taxes and tariffs on high carbon products – seems unlikely. Since alternative energy stocks have already rallied sharply, there may be a risk to those gains if the election does not result in a ‘Blue Wave’.”

“Biden’s proposed efforts to try to stop Iran from enriching uranium, in exchange for dropping sanctions, could lead to the markets pricing in an increase in oil supply. Any supply increase could keep a lid on energy prices while demand continues to recover in 2021 and limit the market performance of traditional energy companies.”

“While 2020 has been an exception, with COVID-19 being the major economic focus and driver of stocks. In recent years, we have seen the outlook for trade having a heavy influence on the economy and markets. The potential for a less confrontational US stance combined with a multi-lateral approach could mean less overall market volatility tied to trade, particularly for companies dependent upon operations in both the US and China.”

“The stock markets may welcome the potential for more fiscal stimulus (including infrastructure and green initiatives) and lower tariff risk that may come with a Democratic sweep. The trade-off could include higher taxes and labor costs, a tougher and more costly regulatory environment for U.S. companies relative to international peers. Looking to our portfolios, these outcomes could handicap earnings and market performance of US stocks, and lead to relative outperformance of international markets, who have lagged in recent years.”