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Investors assess 'red sweep' over Trump's influence on US economy

Investors assess 'red sweep' over Trump's influence on US economy Photo: Investors assessed the consequences of the “red sweep” by the Republicans and the Trump administration (Getty Images)
Author: Bohdan Babaiev

After the initial market shock reactions to Donald Trump’s victory, investors began analyzing how potential Republican control of the government might impact stocks, bonds, and currencies, according to Reuters.

According to investors, the so-called "red sweep" scenario, in which Republicans control the White House and both chambers of Congress, could allow Trump to implement his economic proposals with greater freedom. Many of these proposals, such as tax cuts, support growth but also increase inflationary risks.

According to the latest vote counts from the committees, Republicans gained a slight advantage in the House of Representatives. However, Democrats managed to secure a few seats in New York state.

Market reaction and stocks

JJ Kinahan, CEO of IG North America and president of online broker Tastytrade, noted that since many of Trump’s policies support stocks, particularly small-cap stocks, markets are likely to respond positively to a "red sweep."

Reuters notes that expectations of such policies being partially implemented under Trump’s presidency helped boost certain sectors of the stock market, strengthen the dollar, and create pressure on Treasury bonds.

Investors have shifted their portfolios toward stronger growth, softer regulation, and the possibility that concerns about inflation might prevent the Federal Reserve from making too deep a rate cut next year.

Reuters writes that one notable shift was the rise in small-cap stocks: the Russell 2000 index (.RUT) rose approximately 8% this week.

Although some of these moves have lost relevance recently, investors are still analyzing how Trump’s policies could impact the markets and the economy in the long term, especially in the "red sweep" scenario.

Trump promised to cut federal regulations, which he believes limit job creation. He pledged to maintain the tax cuts from 2017, which he signed into law during his first term. Trump’s economic team has discussed a further round of cuts to individual and corporate taxes in addition to those implemented during his first term.

Economic growth

Investment strategists at Goldman Sachs said their earnings-per-share estimates for the S&P 500 would rise by about 4% if Trump cuts the corporate tax rate from 21% to 15%.

Analysts at Deutsche Bank stated that in the event of a Trump victory, they would raise their US economic growth forecast for 2025 from 2.2% to 2.5-2.75%. However, they expect a downward revision for 2026, anticipating economic uncertainty tied to an escalating trade war.

Moreover, Reuters reports that Republican control of the government could provide long-term support for the dollar, which has already risen to its highest level in four months against a basket of currencies after a post-election surge this week.

If Republicans achieve a complete victory, strategists at JP Morgan forecast the euro could fall to $1.00-$1.02, roughly 6% lower than its current level, compared to a decline to $1.05 if Congress is divided.

Stock indexes

In the case of a "red sweep," continued strong stock performance is also possible.

According to an analysis of data conducted by Evercore ISI since 1928, the S&P 500 index has averaged a 9.1% increase in years with unified control compared to 6.7% annual returns when the government is divided, with the opposing party holding at least one seat in the Senate or House of Representatives. This year, the index rose by 26% and, on Friday, November 8, reached 6,000 points for the first time in history.

Of course, Reuters continues, even with a Republican majority in Congress, some investors believe the narrow margins in both the House and Senate may still pose challenges for implementing fiscal and regulatory changes.

"We may not get everything that has been promised. The discussion on the campaign trail is always very different than the legislation that gets passed. I think a lot of that is already in the pricing for stocks today," said Paul Nolte, senior wealth advisor and market strategist for Murphy & Sylvest.

US presidential and congressional elections

On Tuesday, November 5, the United States held its regular presidential elections.

The Republican candidate decisively won the race. With the required minimum of 270 electoral votes, Donald Trump has secured 295 votes, while Democratic candidate Kamala Harris has 226 votes.

In addition to the presidential election, Americans also elected members of both chambers of the US Congress. According to preliminary results, Republicans gained a majority in the Senate, which was previously controlled by Democrats. Additionally, the Republican Party is close to securing a majority in the House of Representatives. If this occurs, Trump will fully control the government to implement his legislative initiatives.

The current Speaker of the US House of Representatives, Mike Johnson, was re-elected for the next session of the body.

Political scientist Oleh Saakian does not rule out the possibility of a crisis in the US lasting up to six months following the presidential election.