Wall Street’s election bets face high-stakes test as global economy holds its breath

Wall Street is sitting on a powder keg as Americans vote in one of the tightest elections in history.

Anyone still remembers how things went down in 2016 when Donald Trump shocked the world, beating Hillary Clinton for the Oval?

That night, billionaire investor Carl Icahn bolted from an early-hours victory party to throw down a billion-dollar bet on stocks. It was a mess; markets were crashing, but Icahn saw an opportunity and bet big, convinced that Trump would send Wall Street soaring. He was right!

And right now, markets are loaded up with bets for another Trump win. But unlike 2016, this race is as close as it gets. Polls have been swinging back and forth, and betting markets can’t make up their minds. At one point, the prediction markets leaned toward a Trump win, assuming his tax cuts, tariffs, and protectionist moves would shake things up again.

But new polls showing Kamala Harris gaining ground have made Wall Street rethink everything. With two very different candidates, every policy (on taxes, tariffs, infrastructure, and green energy) is at stake.

How the Trump trade could shake out on Wall Street this time

For those who like risks, the economy’s strength and the Federal Reserve’s accommodating stance give some comfort, no matter who wins. But Wall Street hasn’t forgotten the “Trump trade” that took off in 2016, where everything from small-cap stocks to crypto surged on the back of Trump’s tax cuts and trade wars.

Pro-Trump bets—focusing on inflation, interest rates, and even cryptocurrencies—have had their moment. But that momentum faded with the tighter polling numbers. And there’s a growing question mark around whether those Trump-flavored trades will even hold if he clinches another victory.

Citigroup sees it as an open question whether Trump’s sensitive trading styles will make a comeback if he returns. It all depends on whether the U.S. Congress goes Republican or stays divided, which will set the tone for the next four years on taxes, spending, and market-friendly moves.

Big players are waiting to see if the GOP takes control, which could fuel Trump’s infrastructure spending ideas and slash restrictions on sectors like oil and gas.

Another thing Wall Street’s watching? A contested election. BlackRock warned that the markets aren’t prepared for the disaster that could come if no clear winner emerges. And if that happens, expect some serious turbulence in every single financial market on earth, including crypto.

Markets to watch: From equities to EVs

Let’s break down what’s at stake. Everyone’s eyes are on equities, where investors typically hope for a post-election rally once policy direction is clear. But this time, expectations are low. The S&P 500 dropped last month even though it is up 20% this year.

Tech stocks are largely behind the gains, pushing valuations through the roof. Citigroup says options data shows traders expect a 1.8% swing either way for the S&P 500 right after the election. But individual stocks and sectors will likely be the ones taking the biggest swings, just like we’ve seen so far this election season.

Then there’s the Goldman Sachs index, which tracks investments linked to Democratic or Republican wins. As October ended, the Trump-linked basket slowed down, while Harris-linked stocks picked up.

If Harris wins, we might see more strength in clean energy stocks and companies tied to electric vehicles (EVs). Her platform favors EV manufacturers like Rivian and Lucid, as well as EV-charging companies like ChargePoint and Blink Charging.

Companies making solar tech also look set to benefit under a Harris administration. Meanwhile, Trump has said he’d end Biden’s EV policies on his first day back in office, putting him at odds with these companies.

Tesla, though, sits in a unique spot. It could win with either candidate. Tesla benefits from Harris’s Inflation Reduction Act, boosting the EV sector overall. But with CEO Elon Musk’s open support of Trump, some investors think a Trump victory could give Musk’s empire a boost as well.

What about traditional energy? Trump’s “drill, baby, drill” vibe would likely bring gains for domestic oil players, including giants like Baker Hughes, Exxon Mobil, ConocoPhillips, and Halliburton. Wall Street sees these companies as clear beneficiaries if Trump’s back in charge.

Then there’s the man’s own brand — Trump Media & Technology Group, his social media venture. With Trump in office, this stock would likely shoot up all the way to the moon. It’ll at least come incredibly close.

Tariffs could be a big deal again too. Bloomberg Intelligence estimates a 70% chance of new tariffs, no matter who wins. But Trump’s record as the self-described “Tariff Man” means higher risks. Nike and Adidas, who source heavily from China, will be closely watched, as well as Vietnam-linked brands like Lululemon and Allbirds.

Small-cap stocks, which mostly rely on domestic markets, would likely do better under Trump. Dennis DeBusschere from 22V Research said, “Investors expect large caps to lead under all election outcomes except a Republican sweep. Under a Republican sweep, investors think small caps will lead.”

So, expect a strong focus on smaller companies if Trump manages to secure both the presidency and control of Congress.

Bonds on edge, fearing a Republican sweep

Wall Street’s recent track record on predicting interest rates and the economy? Not great. Still, that hasn’t stopped speculators from piling into inflation-driven trades as Trump’s odds have shifted. A full GOP sweep—with Trump and a Republican Congress—would set off alarm bells for bond investors.

JPMorgan’s strategists predict that a GOP sweep would push 10-year yields higher, with Trump’s tax cuts and tariffs widening the fiscal deficit and driving inflation back up. BNY Mellon said, “The markets are most concerned about a sweep and the lack of checks and balances.”

On the flip side, if Harris wins with a divided Congress, there’s a chance for a relief rally. That would mean gridlock in Washington, keeping government spending in check. But opinions are split on a unified Democratic government.

JPMorgan says it would lead to more spending and higher bond yields. RBC Capital disagrees, seeing this scenario as positive for bonds due to likely corporate tax hikes and a less “business-friendly” environment, dampening risk appetite.

But here’s the thing: no one’s sure how much of a Trump victory is already priced in. The 10-year Treasury yield jumped by half a percentage point to 4.3% since the Fed’s September rate cut. But with the rally came strong economic data, blurring the lines around what’s driving investor expectations. The Federal Reserve’s stance remains a wild card, with more interest rate cuts potentially off the table.

To top things off, this morning, USD slipped 0.2% against major global currencies as polls signaled a tight race, and some traders eased up on Trump bets. 

Equities futures in New York hint at modest gains, with the S&P 500 set to open up 0.2% and the Nasdaq 100 up 0.3%. U.S. government debt yields held steady at 4.31%, though recent weeks saw a sharp rise partly based on a Trump-fueled inflation outlook. This election is seen as a make-or-break moment.