As the U.S. once again stands on the verge of a consequential election, the stakes for the economy and financial markets are extraordinarily high. Kamala Harris and Donald Trump represent starkly different political ideologies and policy approaches, and who ends up victorious will likely shape the economic trajectory of the country over the medium term. As much as U.S. voters are apprehensive going into the election, Canadians also need to consider the potential impact on our own economy, employment, inflation and financial markets.

The dead-heat nature of this race makes it difficult, if not impossible to adequately adjust one’s investment portfolio to either protect or participate in the scenarios that come out of the election. As I mentioned on this week’s conference call, financial markets haven’t exactly been displaying a great deal of concern with less than two weeks to go before the vote. That might reflect a denial of the risks embedded in this election, or simply a view that Congress is going to remain in deadlock such that little of either candidate’s platform will actually get implemented. That said, it is useful to look at how these two individuals could impact the major areas of interest for investors, so we have provided a quick summary below. 

Tax Policy and Corporate Impact

Harris has consistently supported tax policies that prioritize increasing taxes on corporations and the wealthy but has also proposed cutting taxes for small businesses. During the Biden administration, she backed proposals that aimed to raise the corporate tax rate from 21% to 28%, targeting high-income earners to pay a greater share in personal income taxes. While these proposals were softened during negotiations, Harris has remained steadfast in her advocacy for higher taxes on top earners. A potential Harris presidency could revive these initiatives, with an emphasis on corporate accountability and redistribution. Many economists expect that, at a minimum, Harris will allow the 2017 Trump tax cuts to expire in the Spring of next year.

Higher taxes could lead to short-term volatility in financial markets and depress valuations for those companies and sectors which have benefited from lower corporate taxes and favorable capital allocation in recent years. That said, if the Federal Reserve continues to ease policy in 2025, this could offset the drag from tighter fiscal policy. If bond investors and rating agencies believe the fiscal outlook is improved by higher tax revenues, then this could also turn out to be a positive not only for the economy in general, but those same companies.

One of Trump’s signature achievements during his first term was the 2017 Tax Cuts and Jobs Act, which significantly lowered corporate and personal income taxes. A second Trump term would likely build on this legacy, pushing for further tax cuts aimed at stimulating business investment and consumption. In the short term, additional tax cuts could provide a strong boost to corporate profits and stock market performance, particularly in sectors like financials, energy, and technology, which would benefit from lower tax rates and less regulation. This would likely result in bullish sentiment across equity markets, especially in sectors where Trump’s deregulation efforts would be most pronounced, such as energy and banking. However, long-term concerns could arise over the ballooning deficit. With U.S. debt levels already elevated, this could put additional strain on the fiscal balance, potentially leading to higher long-term interest rates and a weaker dollar, which might spur inflationary pressures.

Trade and Foreign Policy

Trump’s aggressive stance on trade, particularly with China, was a hallmark of his first presidency. A second term would likely see a return to protectionist policies, including tariffs and renegotiated trade agreements aimed at bolstering domestic manufacturing and reducing the trade deficit. While this could benefit some U.S. industries, such as steel and agriculture, it would also risk reigniting trade tensions with major partners. If we look back at the 2017-2020 period, the benefits from lower taxes in that first year were eventually chiseled back by 2019 as trade wars mushroomed and caused global economic growth to weaken.

So far, Trump’s platform has excused Canada from any increase in tariffs but that could change. Much of Europe’s economy is already close to stalling, especially Germany, so a return to tariff battles could potentially tip sectors of the continent into recession. Likewise, emerging markets that are dependent on U.S.-China trade, could also face turbulence. The reality though is that regardless of tariffs, China’s importance in terms of trade has gradually bee in decline relative to its trade with other countries and regions.

How much the global economy is impacted by renewed tariffs is unclear, but what is not so vague is what they would do to the U.S. domestic economy. Contrary to the platform rhetoric, the incidence of tariffs is mainly felt among consumers and businesses in terms of higher prices for products and inputs. As expenditures rise on those goods that are impacted, there is less available for other areas, including services. Since the consumer and business investment represents more than 80% of the economy, the impact on growth would potentially be significant.

At the same time, higher prices on final items could push inflation higher or at least prevent a return to the Fed’s target of 2%. Depending on when tariffs are actually implemented, this could either put a floor under where interest rates go next year or send them higher should inflation reverse course and head back to 3% or higher.

Green Energy and Environmental Policy

A central focus of Kamala Harris’s platform is environmental sustainability and combating climate change. As part of the Biden administration, she has been a vocal supporter of legislation like the Inflation Reduction Act, which includes substantial incentives for clean energy production and the transition away from fossil fuels. Should Harris win the presidency, these efforts are likely to expand further. The financial markets would need to recalibrate around this shift. Traditional energy sectors, such as oil and gas, may experience increased regulatory pressure and face challenges to profitability. For example, the imposition of stricter environmental regulations or increased carbon taxes could make fossil fuel extraction less attractive for investors.

On the other hand, companies involved in clean energy production—wind, solar, battery technology, and electric vehicles—might stand to benefit. Harris’s plans to accelerate the green transition could lead to massive government subsidies and private-sector investment, with green bonds and ESG (environmental, social, and governance) funds experiencing renewed interest. In the long run, while this shift could lead to volatility as traditional energy companies decline in market value, it presents a generational opportunity for growth in green sectors. Capital markets might also shift towards climate-focused investment strategies, favoring companies with strong ESG credentials.

Inflation, Interest Rates, and Monetary Policy

As inflation continues to be a primary concern for the U.S. economy, a Harris presidency may be seen by markets as more likely to tolerate higher inflation in exchange for expanded social programs and higher employment. Harris has indicated her support for progressive economists who emphasize the importance of full employment over maintaining low inflation at all costs. While some believe this approach could ultimately result in a more dovish policy stance going forward, the reality is that Federal Reserve independence is going to be even more sacred with a Harris Administration. We would expect that J. Powell would remain Chair for the remainder of his term, thus ensuring continuity of the same policy approach that has been in place for the last four years.

One of the key economic risks of a second Trump presidency is the potential for increased tension with the Federal Reserve. During his first term, Trump frequently criticized the Fed for keeping interest rates too high and interfering with his economic agenda. A second term could see Trump pressuring the Fed to maintain lower interest rates, regardless of inflationary concerns. Again, diminishment of Fed independence is a low probability scenario, but attempts to exert influence could result in increased market volatility.

Short-term and longer-term considerations

In recent calls, I have talked about how the 2016 election playbook is a useful guide for what to expect in the event of a Trump victory. The prospect for extended and enhanced tax cuts would likely provide a boost to equity sentiment in the initial months after the vote. Assuming the Fed remains in easing mode, then you argue that the tone would even more bullish. On the flip side, however, Trump’s unpredictability, particularly in areas like trade and foreign policy, could inject volatility into financial markets. While markets may initially react positively to the promise of lower taxes and deregulation, if we see a negative reaction by longer-dated bonds to increased fiscal risk, then this could cause stocks to recoil.

In contrast, a Harris victory may not see the same degree of upside potential for stocks, but a more stable policy environment could translate into lower volatility. Keep in mind again that if Congress remains effectively split, to the extent that a Harris Administration puts forward some not so market-friendly policies, they may not see the light of day. With tariffs off the table, markets would probably breathe a sigh of relief that global growth could continue to benefit from lower interest rates without threat of trade wars.

Bottom line, the tightness of this election race argues against any major tactical decisions on the portfolio, other than perhaps maintaining equity allocations slightly below target. Liquidity is, however, going to be critical in the weeks ahead and the ability to make course corrections quickly if needed. For now, markets have been fairly sanguine about this major event, so maybe we should be thankful there is some sanity out there.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle