Investors have absorbed a flurry of election news in recent weeks – the assassination attempt on former President Donald Trump, President Joe Biden’s withdrawal from the race and Vice President Kamala Harris’s rapid ascension as the Democratic nominee. Election odds now favor a Harris victory, but with months to go to the election, it’s anyone’s race.

Elections (and other geopolitical events) do not typically have a lasting impact on equity markets.¹ But short-term impacts can be meaningful, and you’d be forgiven if you thought this time might be different.

At this point, we mostly expect a continuation of the status quo under a Harris administration, though she has announced policy proposals for housing, taxes and other priorities in August. Meanwhile, the Republican party released its updated policy agenda during the Republican National Convention in July.² Here, we analyze four key issues – trade policy, taxes, immigration and industrial spending – that could change the status quo should former President Trump be re-elected.

Trade policy: How might tariffs impact growth and inflation?

Trump and Biden have used tariffs (taxes paid by U.S. importers of foreign goods) to bolster national defense and increase the global competitiveness of domestic industries. Trump now advocates a 10% baseline tariff on all imported goods and a 60% (or higher) tariff on goods from China.³ But if Trump’s proposed tariffs were fully implemented, they could lower real U.S. gross domestic product (GDP) by 0.3% to 0.5% in 2025, according to our calculations.

Sweeping tariffs could also deliver a one-time shock to inflation, but this sharp immediate impact would likely fade over time. More – and faster – permitting and leasing in the oil and gas complex could also provide a disinflationary offset, possibly pushing oil prices down 10% to 15% if supply rises.

We estimate that the net impact of tariffs and lower energy prices could lead to a 1.5% to 2% jump in the Consumer Price Index (CPI) on a year-on-year basis.⁴ These reflationary expectations are likely one of the reasons that interest rates rose and the yield curve steepened when betting odds for a Trump presidency increased.

However, it’s worth noting that the final impact of tariffs could be more modest than our estimates suggest. The proposals could be narrowed, and will likely spark legal challenges, as they have previously. Further, the impact could lessen if the tariffs are staggered over time or if custom duties are recycled into targeted industry subsidies that help companies from passing on the costs to consumers.

Our analysis finds that if Trump’s proposals were fully implemented, the impact on major trading peers would be less inflationary than in the United States, but likely more detrimental to growth. Said differently, we expect tariffs to slow growth disproportionately for goods exporters and raise inflation disproportionately for goods importers. For example, we estimate a potential 0.7% hit to eurozone GDP, roughly twice as large as in the United States, but just a 0.2% (or less) increase in European inflation.⁵

Such divergence could have implications for the relative monetary policy stance in each region and thus, the euro-U.S. dollar exchange rate. In isolation, Trump’s tariff policy would likely continue to underpin U.S. dollar strength.⁶

Taxes: Which 2017 tax cuts might be extended?

Whoever wins the November U.S. election, the individual provisions of the 2017 Tax Cut and Jobs Act (TCJA) will expire at the end of 2025.⁷ If they are not extended, tax rates for most individual taxpayers would rise between 1% and 4%.⁸ The law’s corporate tax cut, which lowered rates from 35% to 21%, has no sunset provision.

Trump has said that he would like to extend the law in its entirety, and has even proposed lowering the corporate rate further. Harris has said she would not raise taxes on individuals earning less than $400,000 a year.⁹

If all the TCJA’s provisions are extended, we would expect near-term growth expectations to rise as high as +0.7% of real GDP. Higher growth comes at the cost of an even higher fiscal deficit. The Congressional Budget Office estimates that the fiscal deficit would increase by nearly $5 trillion from fiscal years 2025 to 2034 (as a share of GDP, this would be equivalent to a roughly 1.4 percentage point sustained increase in the fiscal deficit).¹⁰ Of course, rising deficits would only exacerbate the U.S. government’s already elevated levels of federal debt.

At the moment, neither party looks poised to dramatically reduce the U.S. debt burden. That dynamic, along with the potential for growth upside from even lower tax rates, could put further upward pressure on longer-dated yields and keep bond market volatility high into 2025.

Immigration: How would new restrictions affect labor markets?

For many years, immigration has been a sensitive political issue in the United States (and many other developed economies). Since 1986, the U.S. Congress has enacted no new immigration laws. As a result, presidents of both parties have used executive orders to address the issue, though nearly all orders have faced legal challenges.

According to recent Gallup Polls, Americans consider immigration to be one of the bigger issues facing the nation.¹¹ The issue is now a focus of both Democrats and Republicans. In June, Biden signed an executive order to shut down the border under certain circumstances and to limit asylum protection. We expect more of the same under Harris.

Trump has proposed mass deportations of undocumented immigrants should he win the 2024 election. It should be noted, though, that while Trump called for deporting 11 million migrants when he was president, deportations averaged only 300,000 per year between 2017 and 2020.¹²

What are the economic implications of changes to immigration policy?

Over the past two years, immigrants have significantly boosted the U.S. labor supply. This has supported economic growth and added to monthly payrolls gains without materially boosting inflation. Directionally, we would expect the reverse to happen were we to see a material drop in immigration. However, it’s important to differentiate between a reduction in the flow of immigrants entering the United States versus a large deportation of the number of existing immigrants in the country.

History suggests the deportation scenario is unlikely. The chart below shows plausible outcomes for immigration after the election, corresponding to an estimated impact on U.S. real GDP ranging from 0% to 0.6%.

Industrial policy: Where will the spending go?

J.P. Morgan Investment Bank estimates that the Biden administration’s Inflation Reduction Act (IRA) and Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act have stimulated close to $500 billion in announced private investments in semiconductor and clean tech manufacturing facilities. This has been a crucial support to business investment outlays in what would otherwise be a capital investment environment challenged by high interest rates. We would expect the status quo to persist under a Harris administration.

Opposition to the green transition by Trump could pose a risk to parts of IRA and CHIPS act spending. Republicans could slow IRA-related lending by the Department of Energy and reduce some subsidies, but we’d expect that much of the IRA support would likely continue. The majority of IRA and CHIPS Act spending is occurring in traditionally Republican or swing states. Thus, even if Republicans take control of both the House and Senate, the party may soften its opposition to IRA and CHIPS Act spending to appeal to their constituents. In addition, while Republican policies would likely challenge capital investment in renewables, the party remains supportive of fossil fuel capital expenditures (capex).

Conclusion: Some macro risks, but cycle fundamentals are still solid

As we have noted, we currently expect a continuation of the status quo under a Harris administration. Our analysis suggests another Trump administration could be reflationary and a modest headwind to economic growth. However, increased energy supply and lower taxes could work to offset those dynamics.

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