Evolutionary, Not Revolutionary: US Election Results & the Credit Cycle
The United States has finally gone to the polls, and Donald Trump has been declared the winner of the presidential election. The Republican Party succeeded in capturing the Senate, but House control remains in question with many races too close to call. It could be days before we know the composition of the House as we wait for final results. Any recounts or legal challenges would further delay the resolution of the electoral races, but at this point it seems like a sweep for the Republicans with a marginal House majority.
US elections are typically evolutionary, not revolutionary, so we are wary of knee-jerk reactions to political news. Even with a Republican sweep, there are factions in each party that are likely to moderate ambitious policy proposals, especially with a slim margin of control. The macroeconomic landscape will not change immediately post-Election Day. In the meantime, we believe the US economy will continue to chug along through mid-expansion, with election-related volatility potentially providing entry points for investors.
Focusing on the big picture
For us, keeping the big picture in mind is essential. That means staying focused on corporate health and analyzing the credit cycle. Here are the factors grounding our views.
Corporate health: The corporate health outlook remains on firm footing, and consensus earnings expectations remained optimistic through a contentious campaign season. With at least a Republican President and Senate majority, we are confident that the majority of the 2017 Tax Cuts and Job Act (TCJA) provisions will be extended for the corporate sector. We do not expect the corporate tax rate to rise above 21%, even if it’s unlikely to fall to Trump’s proposed 15%. In addition, we believe the promise of deregulation will help lift business confidence. Trade policy remains a larger unknown in terms of economic impact on demand, supply, inflation and, importantly, tax revenue. Trade concerns are likely to be canceled out by optimism over corporate tax cuts, and we expect broad-based positive corporate earnings through the first half of 2025 on the back of stable profit margins and solid free cash flow. Political shifts are unlikely to disrupt the overall stability we’ve observed across the corporate landscape.
The credit cycle: The US economy remains in the mid-expansion phase of the credit cycle. Credit spreads are tight and the ability to issue debt is in strong demand. While future changes to trade and immigration policy are likely to have some impact on labor, growth and inflation, right now the macroeconomic landscape looks solid. The disinflation trend appears intact. Consumers are still spending and the corporate backdrop appears healthy. While the labor market is cooling, we don’t expect a significant pick-up in layoffs as long as earnings hold up. The Fed is already in an easing cycle, which limits downside economic risks.
What we’re watching
Once the new president is inaugurated and the new Congress is installed in January, we will be following policy changes and watching for the impact on demand, supply, inflation, productivity and potential growth rates. These factors could have meaningful consequences for Fed policy and the direction of interest rates.
The president has significant power to deal with illegal immigration and border control, and we expect President-elect Trump to act promptly. But the president has limited power concerning legal immigration without consent of Congress. Congress has given the president vast powers to regulate and tariff international trade, and President-elect Trump may start to use those powers quickly. But control over taxes and spending resides in Congress. What the president will be able to accomplish will depend on whether his party retains control of the House and if they have a functional majority.
The government faces a “fiscal cliff” at the end of 2025 as major reforms passed in the TCJA expire. We expect the impending fiscal cliff to dominate government debate next year. What’s more, the government will need to raise the federal debt ceiling before mid-2025. If Republicans win the House, we expect Congress to pass some version of Trump’s proposed tax cuts. Paired with uncertain tariff revenue, we expect the federal budget deficit to continue growing.
Timeline of key political events in the months ahead
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