Investing.com — Rising betting odds of a Donald Trump victory have led to gains in US equities, yields, and the dollar. In contrast, Europe-focused and tariff-sensitive segments of the market have lagged behind.

Despite the market reaction, polls indicate a close race between Kamala Harris and Donald Trump, with Congress expected to be divided—Republicans are likely to secure the Senate, while Democrats are slightly favored to win back the House.

“Our public-policy analyst sees a divided government as the most likely outcome, with control of Congress split and the presidential race being a toss-up, so not necessarily the Redsweep scenario markets appear to be pricing in,” Barclays strategists said in a note.

“Given the event risk and close nature of the race, market jitters could be expected in the run-up to the vote,” they added.

Historically, global equity markets tend to rally post-election, regardless of the winner, driven by sectors like Cyclicals and Value.

This time, the vote could again serve as a catalyst for increased risk-taking and capital rotation, particularly into European equities heading into 2025. However, strategists caution that “any delay in announcing a winner could create volatility.”

Betting markets currently favor a Red sweep, which could be highly favorable for US equities due to potential tax cuts but bearish for bonds because of inflation concerns.

On the other hand, a split Congress under Harris could alleviate tariff risks and maintain the status quo, which Barclays sees as the best outcome for European equities.

If Trump wins but faces a divided Congress, it could result in stricter tariff and immigration policies, which would be less favorable for US equities and the most challenging scenario for European markets.

Meanwhile, a low-probability Democratic sweep could increase tax risks, negatively impacting US equities, though Europe would remain more neutral in response.

Barclays notes that tariff concerns have weighed on the year-to-date performance of EU equities. In a potential trade war, Germany, Italy, and sectors like Capital Goods, Autos, Beverages, Tech, and Chemicals could face a high single-digit drag on earnings per share (EPS) growth.

“If Harris wins, EU equities could see the tariff risk premium being unwound,” with trade and China-exposed stocks benefiting as they have already priced in some risks.

Bond proxies and clean energy may also rebound following recent pullbacks.

On the other hand, a Trump victory could be positive for Europe if he initiates a ceasefire in Ukraine, potentially boosting EU Cyclicals and the DAX.

European equities outperformed in the month following the last two US in 2016 and 2020.