As the US gears up for the upcoming election, market watchers are evaluating the potential impacts of a clean Republican sweep. According to UBS economists, certain sectors are poised to benefit significantly from such an outcome due to anticipated policy changes, regulatory shifts, and economic trends.
For instance, Financials are projected to be the biggest beneficiaries in the event of a Republican sweep. Historically, this sector has thrived under Republican administrations due to deregulatory policies and robust economic growth.
Specifically, economists said financials would benefit from "less regulation, stronger nominal GDP, a steeper yield curve, and increased M&A activity."
“Financials outperformed most following the 2016 election, and second most following the Trump/Biden debate and the assassination attempt,” they added.
Cyclical sectors, particularly industrials and energy, are also expected to perform well. These sectors typically benefit from economic expansions and deregulation.
"Industrials benefited in all instances,” economists said. “Energy underperformed following the 2016 election, but was the top performer following the debate and assassination attempt.”
Materials, alongside energy, stand to gain from reduced regulatory constraints as well. Less regulation in drilling and other environmental restrictions could provide a significant boost.
Discretionary, on the other hand, was less impacted after the 2016 election.
Trump has advocated for "most favored nations" pricing on pharmaceuticals, which poses a challenge for the Healthcare sector, according to UBS. However, some companies, particularly Humana (NYSE:HUM) and UnitedHealth (NYSE:UNH) could capitalize on insurance rule changes.
The tech sector, while not particularly sensitive to election outcomes, could maintain its stable performance. UBS points out that this industry is "neither economically sensitive, nor highly regulated." As such, it may not experience significant disruption or gain from the election results, continuing its trend based on broader market and technological innovations.
In terms of investment style, Value stocks are anticipated to outperform growth stocks in a Republican sweep scenario. UBS explains that "low P/E stocks led following the Trump election and recent events."
“While Financials and Cyclicals tend to be low P/E, our calculations are sector neutral. Put differently, low P/E stocks outperformed across groups,” economists added.
On the flip side, high-growth stocks were undifferentiated after the 2016 election, and showed underperformance around recent events.
The S&P 500 climbed 21.5% in the year following Trump's unexpected electoral victory in 2016. However, the "Trump trade," characterized by sector and factor leadership, persisted for only one month after the election.