By Saqib Iqbal Ahmed
Investors are now considering the implications of potential Republican control of the government on stocks, bonds, and currencies as the initial market reactions to Donald Trump’s presidential victory begin to settle.
If Republicans were to control the White House and both houses of Congress, it could pave the way for Trump to implement his economic proposals more easily. Many of these proposals, such as tax cuts, are viewed as beneficial for growth but could also increase inflation risks.
As the final votes are being counted to determine control of the U.S. House of Representatives, Republicans have a slight edge, although Democrats have managed to flip a couple of seats in New York.
“With many of Trump’s policies aimed at supporting stocks, especially small caps, the markets are likely to react positively to a red sweep,” said JJ Kinahan, CEO of IG North America and president of online broker Tastytrade.
Anticipation that these policies may be enacted under Trump has led to increases in certain sectors of the stock market, strengthening the dollar, and impacting Treasuries. Investors are adjusting their portfolios in anticipation of stronger growth, less stringent regulations, and the possibility that concerns about inflation could prevent the Federal Reserve from significantly reducing rates next year.
Small cap stocks have notably performed well, with the index rising by about 8% this week.
While some of these market movements have slowed down recently, investors are still analyzing how Trump’s policies could influence the markets and the economy in the long term, especially in a red sweep scenario.
Trump has pledged to cut back federal regulations that he believes hinder job creation. He has also committed to maintaining the 2017 tax cut he implemented during his first term. Additionally, Trump’s economic team has discussed the possibility of further individual and corporate tax cuts beyond those already enacted.
Goldman Sachs strategists indicated that their earnings per share estimates for the would increase by approximately 4% if Trump were to reduce the domestic corporate tax rate from 21% to 15%.
Deutsche Bank analysts mentioned that they would raise their 2025 U.S. growth forecast to 2.5-2.75% from 2.2% in the event of a red sweep. However, they anticipate lowering their 2026 growth forecast due to economic uncertainties linked to an escalating trade war.
Republican control of the government could also bolster the dollar in the long run, as it has already reached its highest level in four months against a basket of currencies following a post-election surge this week.
JP Morgan strategists predict that the euro could drop to $1.00-$1.02, a 6% decrease from its current level, in the event of a red sweep, compared to a decrease to $1.05 if Congress remains split.
Historical data suggests that continued strong performance in the stock market could be expected if a red sweep occurs.
The S&P 500 has historically recorded an average annual increase of 9.1% in years of unified control, as opposed to a 6.7% average return in years of divided government. The index has surged by 26% this year and reached 6,000 points for the first time on Friday.
Despite a Republican majority in Congress, some investors believe that the narrow margins in both the House and Senate could pose challenges in implementing fiscal and regulatory changes.
“We may not see all the promises materialize. What is discussed on the campaign trail often differs from the legislation that gets passed,” said Paul Nolte, senior wealth advisor and market strategist for Murphy & Sylvest. “I think much of that is already factored into current stock prices.”