We’re recording this on the day of the US Presidential Election, and that’s what we’ll focus on today.

There are 7 big things you need to know today, but we promise we’ll run through them as quickly as we can. They focus on the set up, the historical playbook, bottom-up policy implications per our analyst survey, our thoughts on positioning trades, one tailwind that will manifest regardless of what happens, tail risks, and our rundown of what we’ll be watching on election night and possibly the days beyond.

If you’d like to hear more – I’m not going to even try to guess how long this will go. Let’s just get into the details.

Starting with takeaway #1: the set up has evolved a lot, and it’s not easy to say exactly what’s baked in right now.

• We’ve seen several big shifts in polling and betting markets in recent days, weeks, and months, and think it is difficult to know with any degree of certainty what the outcome of the election will be. The national polling averages point to a close race, with some late-breaking state polls, specifically the Iowa Selzer poll, shining a light on the gender gap that’s been seen in many polls, reminding us that turnout will be key, and making us wonder if most pollsters are weighting their polls correctly.

• Betting markets, which we think influence hedge fund expectations, still generally favor Trump, though expectations for Harris have improved since late October. The long-only investors we’ve spoken with recently haven’t had a clear view on the outcome.

Moving on to takeaway #2: we are less interested in short term election trades right now, and more interested in any longer-term opportunities that open up if we see big gaps up or down in equities.

• One of my core beliefs about elections and the US equity market is that the latter must endure some temporary repricings around this event every few years, but that these dislocations tend to be temporary in nature.

• Our historical playbook analysis reminds us that the S&P 500 tends to rise regardless of the balance of power in Washington. The strongest backdrops have tended to be a Democratic Presidency with a split or Republican Congress, and Republicans controlling the White House along with both chambers of Congress.

Next up, takeaway #3: there are bottom-up policy implications in the different possible outcomes of the election, but the tilts for the US equity market broadly are mild.

• The US results of our late September RBC analyst survey lead us to this conclusion.

• We asked our analysts to evaluate the outlook for their industries under four outcome scenarios. The scale was +2 (very bullish) to -2 (very bearish) with 0 representing neutral/mixed, +1 representing bullish, and -1 representing bearish.

• Looking specifically at our US analysts’ responses, in a Republican sweep, the average score was +0.38 and in a Trump win/split Congress, the average score was +0.22 (positive, but closer to neutral/mixed than bullish). In a Democratic sweep, the average score was -0.24 (negative, but closer to neutral/mixed than bearish). In a Harris win/split Congress, the average score was -0.04 (in line with a neutral/mixed view, something also in place for most sectors).

• Note the Republican sweep score is probably a bit too high. Last week, our Homebuilding and Biotech analysts told us they’d become less optimistic for their industries in this scenario due to recent developments on RFK Jr and interest rate dynamics.

• Our survey work has also helped us understand that policy crosscurrents for US equities are complex, with our analysts generally seeing Trump’s approach to regulation and taxes as positives, but his approach to trade/tariffs as problematic.

• We also think it will take time, particularly if Harris wins, for investors to understand what the priorities of a new administration will be.

• Exit polling, which will highlight who turned out and what issues influenced their votes, may also help investors understand what policies might be prioritized in a new administration. If women turn out in large numbers due to views on abortion, propelling Harris to victory, her Administration could interpret that as a mandate to focus on issues like women’s health and reproductive rights, which the stock market seems unlikely to have an opinion on.

Moving on to takeaway #4: in all outcomes, the S&P 500, Financials, Energy, Small Caps, and Europe will be most in focus for us in the days ahead.

• Financials and Energy were really driving the bullish tilts in the Trump win scenarios and the bearish tilt in the Democratic sweep scenario in our analyst survey.

• Europe could outperform if Harris wins given non-US investor views on Trump’s approach to NATO, which we’ve heard a lot about from European investors over the past year. We also found that in the first half of 2024, US/European equity performance tracked Trump and the Trump-Biden spread in the polls and betting markets.

• To a lesser degree, we’ll also be keeping an eye on Consumer Discretionary and Industrials, given Harris’ focus on consumer and small business stimulus initiatives and investor concerns about more tariffs from Trump. Industrials performed poorly during the China trade war and are very expensive.

• It’s also worth keeping an eye on the reaction of 10-year yields to the election outcome, which could adversely impact the stock market due in part to the relationship between interest rates and P/E multiples.

Next up, takeaway #5: in all four outcomes, we think US equities may benefit from tailwinds associated with the passage of the event, as long as a clear winner has emerged.

• In our conversations with investors and review of company earnings call transcripts, it has been apparent to us that many have become “stuck” due to uncertainty about the election and that this uncertainty is acting as a restraint on both trading and company behavior. Simply getting past the event may help business activity get going again.

Moving on to takeaway #6: what could go wrong.

• A close, contested election is the main tail risk we see for US equities in the days and months ahead, though we also suspect that a Democratic sweep could also catch US equity investors off guard. We don’t think a Democratic sweep is likely, given how hard the math is for Democrats in the Senate. But we do worry a little that the risk of this outcome may be a bit underpriced.

Wrapping up with takeaway #7: We’re not making a call on the outcome of the election, but we do want to highlight what we’ll be watching on election night and possibly beyond.

• Like everyone else, we’ll be watching the 7 key swing states along with Iowa (where new polling over the weekend indicated Harris had pulled ahead of Trump).

• In the Senate, we’ll be watching Montana, Texas, Ohio, and Nebraska. Montana and Texas are rated Lean Republican by 270 to win, but may represent the Democrats best shots if there’s a surprise in terms of Senate control. Ohio is viewed by election forecasters as a toss up but is currently held by a Democratic incumbent. In Nebraska, an independent is challenging a Republican incumbent and while polling has been light what is out there points to a tighter than expected race.

• In the House, we’ll be watching the 21 toss-up races, most of which are in blue states or swing states.

• And as noted earlier, we’ll be keeping a close eye on turnout, and what issues drove voters to the ultimate winner.

That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.