Now that the two major U.S. political parties have effectively coalesced around their expected presidential candidates — incumbent President Joe Biden for the Democrats and former President Donald Trump for the Republicans — the policy implications for this year’s elections are becoming clearer.

While markets have generally done well in the long term regardless of the federal government’s political makeup, policy questions still play an important role for Capital Group investment professionals. Changes to how sectors are regulated or government incentives are structured can alter industry trajectories. Additionally, this year could be especially resonant with taxpayers, as provisions in 2017’s Tax Cuts and Jobs Act (TCJA) are set to sunset in 2025 — meaning that, regardless of the outcome of this election, investors will very likely see changes to their tax bills.

“Tax policy is one of the most important issues I’m paying attention to,” says Reagan Anderson, a senior vice president of government and regulatory affairs at Capital Group. “It's going to be hard to keep tax cuts that were made years ago when the deficit is so much bigger now than it was when that law went into effect.”

Investors could also feel the effects of policy in action across a variety of sectors. Both men have outlined a slate of goals that could boost — or hinder — certain industries, with energy becoming a particular focus.

Capital Group analysts, including the scenario-analysis team known as The Night Watch, are keeping close tabs on each potential candidate’s rhetoric and policy positions and thinking through their possible impacts. It’s important to note that Capital Group investment professionals aren’t trying to foretell the future; rather, they’re examining possible outcomes to identify themes and potential risks.

“Our investment group does tremendous fundamental research on companies that we're invested in, top to bottom. That is what we do,” Anderson adds.

No matter who controls the government in 2025, taxation is likely to change.

Few laws have more direct impact on high net worth investors than the tax code. With the lower rates for individual taxpayers established by the TCJA set to expire next year, this election cycle is bound to have a major effect regardless of who wins.

For example, if Congress and the next president take no action by the end of 2025, the highest marginal income tax rate would revert to 39.6%, from its current 37%, while the amount of an individual’s wealth that’s exempt from estate and gift taxes would fall from almost $14 million to approximately $7 million. There’s even an effective tax increase that could fall off: The TCJA’s $10,000 deduction limit for state and local taxes (SALT) also is slated to end.

The candidates are starkly opposed on this issue. Biden wants to raise the corporate tax rate to 28%, which was permanently lowered to 21% by the TCJA; he’d also increase the tax on corporate buybacks from 1% to 4%. Both those moves could weigh on corporate profitability. For individuals, Biden has called for higher rates on the very wealthy, proposing to increase capital gains rates on high earners to match income tax rates and instituting a minimum income tax rate for individuals worth at least $100 million. He’d also selectively allow some of the TCJA tax cuts to expire, pledging to retain the lower rates only for taxpayers earning less than $400,000 per year.

“A Biden administration is going to focus more on the debt and deficit through raising taxes,” explains John Emerson, the vice chair of Capital Group International, Inc. “He's absolutely committed that nobody who makes $400,000 or less will pay more in taxes. Well, that means those who make more than $400,000 will pay more.”

Trump has made fewer specific promises, but what he has offered would be no less sweeping. He’s said he would extend all the TCJA tax cuts and institute a nationwide tariff on all imported goods, with Chinese products being singled out for tariffs of up to 60%. These measures could buoy GDP, but they also run the risk of creating inflationary pressure — not only would the tax directly increase prices, it could add friction to international supply chains.

The energy sector offers a case study of possible outcomes of the presidential election.

Both presumptive candidates have been vocal on their approaches to energy production. Trump has focused on fossil fuels, hoping to turn the U.S. into a net exporter of oil, gas and coal. Biden’s administration has focused on legislation such as the Inflation Reduction Act, which sought to spur U.S. manufacturing, especially in “green” fields such as renewable energy and electric vehicles.

Trump has said that he would immediately end all green energy mandates instituted by the Biden administration. Instead, he’d seek to open more nuclear plants — an option the U.S. has largely abandoned since the mid-’90s — and promote oil and gas exploration by issuing more extraction and pipeline permits. Unsurprisingly, many of our analysts think this would weigh on the renewable energy industry, but some also foresee potentially mixed results for the fossil fuel industry. More drilling means more fuel supply, and that implies lower prices — if costs fall, these industries could ultimately have to run faster just to stay in place. From a wider point of view, lower energy prices could help dent inflationary pressures, perhaps helping to offset the costs of Trump’s proposed tariffs.

Biden, on the other hand, has said he wishes to entrench and potentially expand the renewable energy incentives he’s championed, particularly through the Inflation Reduction Act. A second Biden administration could undergird these tax credits, potentially giving green industries and electric carmakers more confidence to make long-term decisions.

Regardless of short-term effects, markets have generally done well over the long term.

While policies can affect stock valuations, they’re not the sole drivers of the market. Periods of sentiment-driven froth can tempt investors to try to time the market, but that’s rarely going to pay off long term, Emerson cautions.

“Think back to previous elections. In 2009, if you were concerned that a former community organizer assumed the presidency at the height of the global financial crisis and went to cash, you would‘ve been really smart for about six weeks and then you would‘ve missed out on a decadelong bull market,” he says. “By the same token, if you were flabbergasted that Donald Trump surprised the political world in 2016 and went to cash, you would‘ve been smart for one day — the market came back the next day, and with the exception COVID, it did very, very well.”