(Bloomberg) -- Strategists at JPMorgan Chase & Co. and Morgan Stanley agree: bond yields will set the direction of travel for US equities in the aftermath of Tuesday’s election.
A win for Donald Trump together with a Republican sweep of Congress followed by limited moves in the 10-year Treasury yield on expectations of improving economic growth would be positive for equities, according to a Morgan Stanley team led by Michael Wilson. In that case, cyclical stocks such as financials and industrials would outperform, they wrote in a note.
If yields move “materially” higher due to concerns over the fiscal outlook, however, stock markets would see a risk-off move, with tariff-sensitive consumer stocks losing ground, they said.
Treasury yields fell on Monday as polling data ahead of Tuesday’s US elections prompted some investors to pare the so-called Trump trades. Polls show Democratic nominee Kamala Harris and Trump are in a close race, with Harris having a slight edge nationally and in some swing states.
If Harris wins the White House and Congress is divided, tariff-exposed consumer equities and renewables could outperform in the short term, the Morgan Stanley team wrote. In such a scenario, a fall in rates could also benefit housing-sensitive consumer stocks while financials, industrials and commodity-sensitive industries could underperform.
Mislav Matejka’s team at JPMorgan is also telling stock investors to keep a close eye at the bond market.
Investor positioning in equities is higher than in 2016, the strategists wrote, with a Trump win and positive market reaction widely expected.
“While equities could have a knee-jerk bounce on a Trump win, in sympathy with the 2016 template, the sustainability of the up move is likely to depend on the magnitude of the bond yields’ response,” the strategists wrote in a note.
If Harris wins, uncertainty over the path of corporate taxes would increase near term, though in the medium term equities might find support from the reduced risk of tariffs, they said.
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