Inside Markets — Election and Risk

Markets and businesses generally prefer a divided government election outcome given a reduced likelihood of significant change. Trade policy seems to be on the agenda regardless of the outcome with increased tariffs likely in a second Trump Presidency regardless of Congressional control. This outcome could be partially or fully priced into markets given recent dollar strength and upward bias in bond yields. A Democrat sweep would be the bigger near-term risk for equity markets given no apparent pricing for a 7 percentage point increase in the corporate tax rate to 28%. Sell-side strategists estimate a corporate tax increase to 28% from 21% would reduce forward S&P 500 EPS estimates by 5-10%.

Elevated equity volatility is the primary risk to equity markets given the current ~21.5x forward multiple on the SPX. Bond market volatility (MOVE Index) has risen to a year-to-date high but the risk of it spilling into equity markets remains low given how it happened over the course of weeks rather than days. The SPX can sustain its current forward multiple as long as the VIX remains below ~22.