How will the Election Results Impact Markets?

Troy Noor, CFP®, CFA

We’ve heard from several clients wondering what's next in light of results from last week’s elections.  When making investment decisions, it's important to remember that it's primarily the economy and earnings that drive investment results and policy influences the environment on the periphery. Part of our job as advisors is providing the occasional reminder that markets go up over the long run (regardless of the new hot topic the news wants us to focus on).

Regardless of who’s in the White House, one pattern persists: macroeconomic and company fundamentals weigh more heavily than political ideologies in determining how stocks will fare. Regardless of the administration's political leaning, economic drivers such as interest rates, technological innovation, fiscal policies, and global trade relationships remain critical factors that influence market performance. When we look back at the stock market over the past, it’s important to know that presidents don’t control markets:

Market Behavior and Presidential Cycles

Historically, the U.S. stock market has exhibited growth trends under both Republican and Democratic presidents, driven largely by broader economic conditions rather than specific policies. Factors like GDP growth, corporate earnings, consumer spending, and the monetary policies of the Federal Reserve (Fed) have a much more direct impact on market behavior than the party in power.

For example:

• Under President Obama, the market rallied as the economy rebounded from the 2008 financial crisis, aided by aggressive monetary stimulus from the Fed.
• During President Trump’s term, the market continued its growth trend, buoyed by corporate tax cuts, deregulation, and low interest rates.
• Under President Biden, despite crippling inflation, companies have been able to pass on price increases to consumers and thus, markets have remained strong. Driven by the post-pandemic recovery, massive fiscal stimulus and ongoing low interest rates helped lead markets to new all-time highs.

The chart below illustrates the performance of the S&P 500 and the economy under different administrations and the importance of not letting our political affiliations influence our investment-making decisions.

This consistency suggests that, while political decisions can affect certain sectors, broader economic policies like interest rate cuts and technological innovation hold more sway over long-term market performance.

The Positive Effects of a Rate-Cutting Environment

A key driver of stock market performance is the interest rate environment. A rate-cutting cycle, where the Federal Reserve reduces interest rates, has typically had a positive effect on financial markets. Lower interest rates make borrowing cheaper for businesses and consumers, which can stimulate investment and spending. Companies are more inclined to take on debt for expansion, and consumers find it easier to finance large purchases, such as homes and cars. This stimulates overall economic activity and drives corporate profits and stock prices higher.

In recent years, the Federal Reserve has been accommodative, meaning they’ve held interest rates low as a way of encouraging economic growth, especially in times of economic uncertainty. These rate cuts are designed to stimulate demand and encourage business investments, particularly in sectors like technology, where capital expenditures can be high. With the worst of inflation behind us, we expect the Federal Reserve to continue down this rate cutting path, which should be a boost to stocks.

Artificial Intelligence: A Key Growth Driver

Artificial intelligence (AI) is emerging as a powerful driver of market growth, especially in a low-interest-rate environment. AI has the potential to revolutionize industries by increasing productivity, improving decision-making, and unlocking new business models. In sectors such as healthcare, manufacturing, and finance, AI can streamline operations, reduce costs, and generate new revenue streams.

With companies aggressively investing in AI, from major tech giants to smaller startups, the sector has seen explosive growth. Lower interest rates support this investment, as companies can borrow cheaply to fund research and development (R&D) initiatives. This is critical for AI, which often requires significant upfront investment in data infrastructure, cloud computing, and talent acquisition.

As AI continues to develop, its influence on the broader market could be profound. AI-driven advancements are likely to enhance corporate earnings growth, increase market valuations, and create new opportunities for investors. Moreover, industries that adopt AI early could see higher productivity and efficiency, further boosting profitability.

The Inflationary Impact of Fiscal Policy: Tax Cuts and Tariffs

While rate cuts and AI investments can provide strong tailwinds for the market, fiscal policies such as the extension of the Tax Cuts and Jobs Act of 2017 and tariffs could risk re-introducing inflation risk.

1. Tax Cuts and Jobs Act of 2017: The TCJA was a hallmark policy of the Trump administration, lowering the corporate tax rate from 35% to 21%, doubling the standard deduction for individuals, and expanding the Child Tax Credit. While this policy spurred short-term economic growth and boosted corporate profits, its extension could have inflationary consequences. By cutting taxes for Americans in 2017 (during the midst of an already hot economy), the TCJA increased disposable income and spending power, which stoked inflation. Moreover, extended fiscal stimulus through tax cuts is projected to increase the federal deficit by approximately $5.0T unless offsetting budget cuts are implemented, further fueling inflationary pressures.

2. Tariffs: Trade policies, particularly the imposition of tariffs, also play a crucial role in market behavior. Tariffs imposed on imports, such as those on Chinese goods during the Trump administration, raise the cost of inputs for businesses. These higher costs are often passed on to consumers, leading to inflationary pressures. While some industries (e.g., domestic manufacturing) may benefit from protectionist policies, other sectors—particularly those reliant on global supply chains—can face margin pressures, impacting overall market performance.

Balancing Growth and Inflation

In a low-interest-rate environment, coupled with strong investment in AI, the market stands to benefit significantly from productivity gains and innovation. However, the risk of inflation—spurred by the extension of tax cuts and protectionist tariffs—remains a concern. If inflation rises too quickly, the Fed may be forced to reverse course and raise interest rates, which could dampen market growth and investment activity.

Moreover, inflation reduces purchasing power and can lead to higher costs for businesses, eroding profit margins. Investors need to be mindful of these risks and prepare for potential market volatility as the effects of these fiscal policies play out.

The behavior of the market under different presidential administrations is often shaped by macroeconomic trends rather than political ideologies. While policies like tax cuts and tariffs can have short-term impacts on specific sectors, broader drivers such as interest rates and technological innovation—particularly AI—play a more significant role in shaping long-term market performance.

A rate-cutting environment encourages investment and stimulates growth, while AI offers transformative potential for corporate profits. However, the potential inflationary effects of extended tax cuts and tariffs could pose challenges. Balancing these forces will be key to maintaining market stability and ensuring sustained growth in the years to come. Investors should remain vigilant, monitoring fiscal and monetary policies closely while positioning themselves to capitalize on the ongoing technological revolution.