• UBS has conducted a market scenario analysis for four possible election outcomes.
• The company believes that the best chances are for Kamala Harris to become president and for Congress to be divided.
• According to UBS, this is likely to have a slightly negative impact on share prices, while a Republican victory would initially be positive.

Since President Joe Biden dropped out of the presidential race in July, predictions for what might happen in November have changed dramatically.

The sudden candidacy of Kamala Harris has restored confidence in a possible Democratic victory that had begun to wane under Biden. With just 100 days to go until the election, her poll numbers are now higher than those of her rival Donald Trump.

Harris’ rise prompted UBS to update its equity market forecast based on the election results. The bank had issued a similar analysis in March, when Biden was still in the race.

(1) Harris wins despite divided Congress

UBS predicts a 40 percent chance that Harris will take over the Oval Office while Congress is divided.

The scenario would have minimal impact on stocks and would boost companies focused on renewable energy and energy efficiency. The bank expects a recovery rally to boost beneficiaries of the Inflation Reduction Act, while a regulatory overhang could cause fossil fuel companies’ stocks to fall.

UBS said strict regulations could also constrain the financial sector as Harris will maintain an “ideology against big financial services.” Biden has been calling for tighter oversight since the collapse of Silicon Valley Bank in March last year.

At the same time, Congress would prevent Harris from advancing important legislation in the industrial and healthcare sectors.

(2) Trump wins clearly with the Reds

If Harris does not win, UBS sees a 35 percent chance that Republicans will win both Congress and the White House. When Biden was still in the race, this was the most likely outcome, the bank previously predicted.

In this case, Trump would face fewer constraints in implementing his much-vaunted policies, such as his promise to raise tariffs and extend the 2017 corporate tax cuts.

UBS believes that in this scenario, regulation will be relaxed and merger and acquisition activity will likely increase. These factors would support fossil fuel investments and would be the best-case scenario for financials.

Thus, a positive outcome of the Red Sweep would be slightly positive for the stock markets, although the bank expects that Trump’s other proposals will dampen the initial excitement on the markets.

For example, many economists have expressed concerns about higher tariffs, fearing that increased tariffs could fuel inflation. Trump has repeatedly dismissed these warnings, instead calling for blanket tariffs on all U.S. trade and a 60% tax rate on Chinese exports.

In this case, UBS expects rising interest rates and a rising dollar exchange rate. Higher tariffs could also hit the technology sector, especially the hardware and semiconductor industries.

The bank pointed to possible negative effects of Trump’s proposals on the healthcare system, such as plans for an international drug price index.

(3) Harris wins the Blue Sweep

UBS sees a 15 percent chance that the Democrats will take over both branches of government. If that happens, it would be the worst outcome for stocks, the statement said.

This scenario would be slightly negative for the market as investors would see the 2017 tax cuts expire and regulation would tighten. Financial and fossil fuel companies would be hit hardest, driving up costs in both industries.

Some efforts could be made to increase the IRA’s bargaining power on drug prices, but it is questionable to what extent Democrats in the biopharma states are willing to implement this.

In the meantime, there could be an increase in estate taxes and restrictions on state and local tax deductions.

Overall, lower growth would lead to a decline in interest rates as disinflation continues.

(4) Trump wins despite divided Congress

The least likely outcome UBS expects is that Trump returns to the White House without the support of a Republican Congress. The probability of this happening is 10%.

In this scenario, the impact on equity markets will be mixed. As with a red sweep, tariffs will continue to bring inflationary pressures and a stronger dollar, which in turn will push interest rates slightly higher.

The bank said capital spending in the industrial sector could decline as uncertainty surrounding green energy initiatives increases.

Meanwhile, UBS expects the regulatory backlog in the fossil fuel and financial sectors to ease somewhat, with the latter benefiting from the appointment of new regulatory chiefs at the US Federal Reserve, the FDIC and the US Securities and Exchange Commission (SEC).