Upcoming US election and equity implications from JPMorgan

Investing.com - The upcoming U.S. presidential election looks set to be a divisive, closely fought contest, and JPMorgan explores the various scenarios and how to play the associated impact.

Tight U.S. Presidential election looms 

President Joe Biden and former President Donald Trump are set to face each other on Nov. 5 in what will be the first presidential rematch in nearly 70 years.

Trump may have a series of unprecedented legal challenges to overcome, but recent polls suggest a very close call in the vital U.S. swing states - the seven states which are likely to decide the outcome of the U.S. presidential election.

 Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin - known as swing states because they swing between Democratic and Republican candidates - play a critical role in determining which candidate wins the Electoral College, the vehicle that picks U.S. presidents.

“The fact that such a high-stake election cannot be called at this point in time should be some cause of concern for equity investors looking to manage exposure to key U.S. policy themes,” said analysts at JPMorgan in a note, dated May 7.

“There remains significant uncertainty and room for a November surprise given how narrow the leads are for either candidate and for both chambers of Congress.”

Potential policy differences

Gridlock is probably the most neutral outcome in the short/medium term, the U.S. investment bank said, as it would limit changes to existing policies passed under the current administration and limit the implementation of new, and possibly volatile ones, though risks remain around unilateral executive and/or agency action. 

With this in mind, it makes sense for investors to focus on managing the risks of a Republican President (with/without a Republican Congressional majority), as it would be a more meaningful departure from the status quo. 

A scenario in which Trump wins the Presidency with a divided Congress would be impactful to the market through likely changes in U.S. trade policy, foreign policy, energy policy and additional scrutiny as it relates to anti-trust issues, especially regarding media companies. 

Looking at trade, a Trump presidency could result in the raising existing tariffs on China to 60%, imposing a 

10% universal tariff on all other trading partners and/or a 100% tariff on auto production in Mexico by Chinese automakers, JPMorgan noted.

These areas are largely governed by the executive and can be influenced without explicit congressional approval. 

Changes to U.S. foreign policy on Russia/Ukraine and the Middle East could shift perceived geopolitical risks in both regions, and especially in the case of Iran, where more hawkish responses have been advocated by Republicans. 

Lastly, this scenario could see significant barriers lifted by selling more federal land and eliminating climate regulation,

A situation where the Republicans retake the White House and the Senate with the possibility of keeping/expanding their majority in the House, would mean that key legislative achievements under the current administration would face scrutiny, such as provisions of the Inflation Reduction Act.  

Additionally, this could open the door for permanent individual tax cuts that are sunsetting at the end of 2025. The statutory corporate tax rate would be maintained, with the potential for new business incentives/subsidies funded by proceeds from the tariff increases. 

The repeal of permanent normal trade relations with China would require congressional support, but could be another course for influencing U.S.-China trade. 

Lastly, while no clear position has yet been staked out by Republicans regarding defense spending, rising geopolitical tensions could trigger calls for additional outlays, especially for domestic infrastructure.  

How to strategize these outcomes

For investors looking to manage exposure to escalating U.S.-China tariffs, JPMorgan recommended keeping a wary eye on U.S. companies with high direct revenue exposure to China, such as Tesla (NASDAQ:TSLA), Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA), Broadcom (NASDAQ:AVGO) and Qualcomm (NASDAQ:QCOM). 

For energy names well positioned for elevated geopolitical risk such as taking a stronger position against Iran, the bank recommended investors look at the likes of overweight-rated Exxon Mobil (NYSE:XOM), Devon Energy (NYSE:DVN) and Marathon Oil (NYSE:MRO).

U.S. companies sensitive to healthcare provisions within the Inflation Reduction Act and potential follow-on legislation include the likes of AbbVie (NYSE:ABBV), Amgen (NASDAQ:AMGN), Regeneron (NASDAQ:REGN), Eli Lilly (NYSE:LLY), Pfizer (NYSE:PFE) and Thermo Fisher Scientific (NYSE:TMO).

Finally, JPMorgan has identified companies that are sensitive to changes in the U.S. federal budget, and in particular sensitive to changes in U.S. defense spending. These include GE Aerospace, Lockheed Martin (NYSE:LMT), Boeing (NYSE:BA), General Dynamics (NYSE:GD) and Northrop Grumman (NYSE:NOC).