Republican Win Likely To Lift Magnificent 7 Stocks, Democratic Sweep 'Better For Bonds,' Says WisdomTree

Investors are zeroing in on what potential political outcomes in the U.S. elections Tuesday could mean for the markets.

WisdomTree's Global CIO, Jeremy Schwartz and Senior Economist Jeremy Siegel have shared insights on how a Republican or Democratic win could shape sectors across both the equity and bond markets.

Here's what WisdomTree sees on the horizon.

Bond Market Volatility: How Policy Could Shape Yields

Siegel said bond markets are primed for volatility, with each election outcome pointing to different scenarios for interest rates and yields. A Republican sweep, accompanied by tax cuts and heightened fiscal spending, could push bond yields upward by 20 basis points or more, he said. In this scenario, investors might brace for inflationary pressures and potentially tighter monetary policy, which would counterbalance any short-term equity gains.

On the flip side, a Democratic sweep is seen as a stabilizing force for bonds, with expectations for moderated spending and pro-growth fiscal restraint.

WisdomTree's Kevin Flanagan, head of fixed income strategy, notes that Democratic policies might offer a predictable, low-volatility environment that helps maintain steady rates and tempers inflation concerns.

A divided government could yield the "best case" for bonds, creating stability through gridlock that limits sweeping fiscal changes and curbs deficit growth.

Equity Market Winners: Mag 7 In Focus Under GOP, Infrastructure & Clean Energy For Democrats

For equity markets, each scenario presents distinct opportunities, particularly in the growth-oriented and infrastructure sectors. Under a Republican administration, WisdomTree expects an initial boost in stocks like the Magnificent Seven: (Meta Platforms Inc META, Apple Inc AAPL, Alphabet Inc. GOOGL GOOG, Microsoft Corp MSFT, Amazon.com Inc AMZN, Nvidia Corp NVDA and Tesla Inc TSLA.

The Magnificent Seven stocks could be driven by extended tax cuts, reduced regulation, and potential capital gains exemptions.

The Roundhill Magnificent Seven ETF MAGS provides exposure to the Magnificent Seven stocks along with other popular tech-heavy ETFs such as the Invesco QQQ Trust, Series 1 QQQ, the Vanguard Information Technology ETF VGT and the Technology Select Sector SPDR Fund XLK.

This favorable backdrop for the tech-heavy sector could stimulate momentum, although Siegel cautions that rising yields might cap equity gains by pressuring valuations.

In contrast, a Democratic sweep would likely favor sectors tied to clean energy and infrastructure. With a focus on the Inflation Reduction Act, the Democratic agenda is expected to channel substantial support into solar, hydrogen and renewable energy projects. The Invesco Solar ETF TAN provides exposure to solar stocks.

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This shift would likely benefit clean energy stocks while weighing on small-cap stocks with high U.S. revenue exposure, as they would face the most significant earnings impact from higher corporate tax rates.

Investors in clean energy ETFs such as the iShares Global Clean Energy ETF ICLN and First Trust Nasdaq Clean Edge Smart GRID Infrastructure Index GRID and those invested in small-cap stocks via ETFs such as the iShares Core S&P Small-Cap ETF IJR or the iShares Russell 2000 ETF IWM should be wary of their holdings.

According to Wisdom Tree, Democratic leadership could also benefit international markets, as the reduced likelihood of higher tariffs might ease trade concerns and foster demand.

Navigating The Election Landscape

Beyond direct impacts on stocks and bonds, WisdomTree suggests that a blend of strategies, such as private credit, inflation hedges like gold, and international exposure with currency hedging, may help investors manage market uncertainty.

Trade policies, inflation, and the Federal Reserve's trajectory are all likely to play roles in shaping post-election strategies, underscoring the value of a diversified approach.

As the U.S. awaits the election results, WisdomTree's analysis highlights a divided outlook for investors. Whether the election ushers in policies that lift the Magnificent Seven stocks or bolsters the bond market, each scenario brings unique opportunities and risks to watch in the weeks ahead.

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• Bond Market Fear Gauge Soars To 1-Year High Ahead Of US Election Results: ‘Bond Vigilantes Have Been Voting Early’

Image created using artificial intelligence via Midjourney.