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Former President Donald Trump's successful bid to return to the White House for a second term and the potential for an accompanying "red wave" represents a historic win that could affect corporate borrowers we rate.

What We're Watching

From a legislative perspective, Republican majorities in both halves of Congress will make it easier for President-elect Trump's new administration to push through his agenda. But even if Democrats hold onto the House, presidents enjoy fairly wide latitude to sign executive orders that can change the credit landscape—including levying tariffs on imports, which appears to be the issue with the most potential ramifications for the borrowers we rate.

With the caveat that campaign rhetoric doesn't always translate into policy, President-elect Trump has suggested a 10% tariff on all goods imported to the U.S. as well as tariffs of 60% on all Chinese goods.

What We Think And Why

While S&P Global Ratings believes that these levels are unlikely and may just be a starting point for negotiations, we think that under a scenario of across-the-board tariffs of 10% and/or an increase in levies on Chinese imports to 60%, the effects would be inflationary in the short term—with companies facing higher input costs and consumers paying more for finished goods. And these levels would likely be a drag on U.S. GDP in the medium term, while underpinning still-high benchmark interest rates, and accelerate the diversification of supply chains, in particular away from China.

Increasingly protectionist trade policies that result in higher input costs for many industries will pressure profit margins. We expect those industries with highly engineered products dependent on China for specialized manufacturing to be hardest hit because these facilities are the most expensive to relocate and hardest to staff. Such products comprise semiconductors and electrical components supplied to technology companies.

This also applies to the utilities and power sectors focused on renewable energy. These companies have a meaningful reliance on China for products such as solar panels, wind turbines, and battery chemistries. Although higher tariffs can be passed through to customers, more severe trade restrictions could challenge the sector's ability to meet renewable-energy goals and effectively manage credit quality.

We anticipate that other sectors dependent on Chinese suppliers such as consumer products, retail and restaurants, health care, and homebuilders/building materials will be affected, as well. However, to the extent that this latter group depends more on commoditized imports, they would likely have more success finding alternative suppliers or moving their operations, more quickly and at a cheaper cost.

While the predominant impact of tariffs is expected to be negative to neutral, we have identified two sectors most likely to benefit from a more protectionist stance. U.S. metals and mining companies tend to be higher on the cost curve, and tariffs could go some ways to level the playing field for local buyers. Issuers in the chemicals sector would benefit in a similar fashion, although they may be facing customers with heightened price sensitivity given recent softening demand.

Elsewhere, various provisions of the 2017 Tax Cuts and Jobs Act (TCJA) are set to phase out in 2025, and Congress faces a specific deadline by which it must revisit the tax code. At least some legislative action is likely, with interest deductibility, bonus depreciation, and deductions for research and development all up for debate and potentially made permanent. This opens the door to negotiate provisions that could have credit implications, such as the corporate tax rate and the tax-exempt status of municipal bonds.

The TCJA lowered the corporate tax rate to 21%, from 35%, and Republican leaders have suggested further lowering the rate to 15% for U.S. companies that make their products in the U.S.

Naturally, a lower corporate tax rate, where applicable would reduce a company's tax expense, and taxes paid. The effects on credit ratios would appear most directly from improvements to funds from operations (FFO) and, thus, to FFO-to-debt ratios and FFO-to-interest coverage. Lower cash outflow will also boost the cash available to service debt.

As with taxes, immigration policy must go through Congress and could take longer to enact. Nonetheless, the president can influence the extent to which current laws are enforced. We observe that employers most reliant on unskilled or less-skilled labor are most likely to be affected by deportations or reduced immigration due to tighter border controls. The homebuilders, and hotels, gaming and leisure sectors stand out as facing somewhat negative effects in this regard.

What Could Change

In addition to trade- and tax-related issues, the regulatory environment is largely determined by the party in power. Clearly, this can affect energy-related industries such as oil and gas production, and others that have an outsized impact on the climate.

Also, bank regulation was last eased early in the prior Trump Administration when both houses of Congress had Republican majorities, and we believe the Republican majorities lower the odds of any regulatory tightening.

From a sovereign perspective, we expect the central government budget deficit to remain near current levels in 2025-2026—which means that the U.S.'s net general government debt could soon exceed 100% of GDP.

Writers: Joe Maguire and Molly Mintz