As the 2024 U.S. presidential campaign unfolds, market analysts are closely monitoring potential outcomes.
According to Piper Sandler in a note to clients Wednesday, a Trump victory could lead to a "small if not negative effect on the equity markets," with the firm estimating a dip ranging from 0.7% to 2.6% in the S&P 500.
Despite recent shifts in the race, including President Biden's withdrawal and Vice President Harris's likely nomination, Piper Sandler's projections on financial markets remain largely unchanged.
The analysts caution that their models are built on "strong assumptions and flawed metrics," but they still provide a glimpse into how the firm sees the market behaving under different electoral outcomes.
The key concern for equity markets revolves around uncertainty, says the firm.
"An incumbent loss could generate uncertainty about what's next, from taxes to tariffs," the note explains.
This uncertainty, particularly around the equity risk premium, is expected to weigh on market valuations if Trump wins. Furthermore, Piper Sandler says the possibility of increased long-term Treasury yields under a second Trump administration adds to the risk, with projections indicating a 22 basis points rise in the nominal 10-year U.S. Treasury yield.
Piper Sandler's analysis also suggests market-neutral trading strategies in response to a potential Trump victory, advising positions such as being short on the Mexican peso and certain sectors like cannabis, while going long on technology stocks.
Ultimately, while the odds of a Trump victory have fluctuated, Piper Sandler remains cautious about the equity market's prospects, forecasting a modest decline in the S&P 500 should Trump return to the White House.