2024-10-28 23:00:00
In the long term, the economic policies of Donald Trump and Kamala Harris are fiscally unsustainable. But they diverge sharply in the short and medium term.
A few days before the American presidential elections, there is no shortage of articles or analyzes on the two candidates. But the attention of financial markets is mainly focused on the economic policies that distinguish them.
They can be classified into four categories. The first concerns taxes and, of course, their impact on the budget. The second concerns monetary policythe third on trade and the last one on geopolitics, and more particularly on immigration.
Currently at 21%, corporate taxes would be reduced to 15% under Trump and raised to 28% under Harris.
Less taxes for one, more taxes for the other
Taxes are the main course. This takes us back to the time when Donald Trump launched, during his first presidency, the TCJA (Tax Cuts and Jobs Act)that is, the Tax Cuts and Jobs Act. The corporate tax rate was reduced from 28% to 21%. Income tax has also been reduced for all income brackets, but especially for the ultra-rich.
It is on this point that Trump wants to act by further lowering the corporate tax rate to 15% and adding a new layer of tax reduction for all income classes, but a little more for the highest incomes. The contrast is striking with Kamala Harris which, as Joe Biden has already stated, would raise the corporate tax rate to 28%while the average national tax rate for the ultra-rich would rise from almost 30% to almost 42%.
In addition, Democrats would like to impose a 4% tax rate on stock buybacks et tax capital gains as ordinary income for the highest incomes. But Harris would extend the TCJA for lower incomes.
It is obvious that lower or higher corporate tax rates have a direct impact on their profits. According to some studies, the average earnings per share of the S&P500 index would decrease or increase by approximately 6%. The most affected sectors are consumer discretionary, communication services, financials and small caps. Consumer goods sectors are also directly impacted by lower or higher personal income taxes.
Public finances in danger
But even if the two candidates will pursue opposing policies on tax matters, both Republican and Democrat will derail public finances. Kamala Harris is taking this path in particular by increasing subsidies.
Will the bond markets be able to withstand such slippages in public finances?
The extent of the budgetary slippage will, however, differ significantly depending on whether Harris or Trump is the new tenant of the White House. Thus, still according to studies, the deficit would widen by around 6,000 billion dollars with the Republican and by around 2,000 billion with the Democrat.
Translated into percentage points of deficit relative to GDP, Trump would add between nine and 11 percent over the next ten years, while Harris would be somewhere between six and 7 percent. Already today, nearly one in seven dollars spent by the American government is devoted to servicing the debt. This figure will only increase. Hence the question: will the bond markets be able to withstand such slippages in public finances?
Another tricky point of view regarding Trump is his desire to direct American monetary policy. He is convinced that the dollar is too strong and that interest rates should fall. Several analysts raise the possibility that he will replace Fed Chairman Jerome Powell.
Will the checks and balances inherent to American democracy prevent it? It’s possible, if Congress is divided. But the markets fear any interference in monetary policy.
More or less aggressive trade war
Let’s now talk about trade. Under Trump, all imported goods will be taxed at 10%, while tariffs on Chinese imports will rise to at least 60%. Harris, on the other hand, will also apply protectionist policy, but rather through subsidies and trade restrictions.
Depending on Chinese trade retaliation or not, the impact on earnings per share by sector could range between 6 and 16%.
The risk is that ofa trade war of the “I’ll give you back” type. It is clear that some sectors are more exposed than others. But it is estimated that growth would be affected and that profits of companies in the S&P 500 index would fall by at least 3%.
Chinese retaliation would only make the situation worse. The consumer discretionary, materials and industrials sectors would be most affected. Depending on the retaliation or not, the impact on earnings per share by sector could range between 6 and 16%.
Finally, there is l’immigration. Trump wants to deport illegal immigrants. However, eight million undocumented workers represent 5% of the active population. Sending them back would have significant consequences on the job market, and therefore on wages.
Further rate cuts compromised
All this put together, the economic change of course would be most pronounced with Trump. Which is ultimately logical since Harris was vice-president under Biden. The Trump administration could see markets and the economy boosted by lower taxes, but its policies are inflationary in nature, which could therefore jeopardize future interest rate cuts.
The two candidates will not refrain from any budgetary generosity, which could come back to haunt them later
The trade war is a danger for the global economy, but less so for the United States, whose economy is less dependent on trade than that of Europe or China. That said, the two candidates will not deny themselves any budgetary generositywhich could come back to haunt them later. Especially if Trump wins.
Therefore, all things being equal, stock markets should benefit from a Trump victory. At least in the short term.
Becausein the medium term, the Republican’s inflationary policy could come back to disrupt the markets. And in the longer term, the policies of both candidates appear fiscally untenable.
Par Frank Vrankenchief strategist at Edmond de Rothschild.
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