What does Labour’s landslide victory mean for financial markets?

Sir Keir Starmer has become the UK’s newest Prime Minister, after a landslide Labour victory in the 2024 general election. The party has secured 412 seats and 34% of the national vote so far, with two constituencies still to declare.  

MoneyWeek has already looked at what the election result could mean for your money, based on pre-election pledges made in the Labour manifesto. Now, we look at how markets have reacted to news of the Labour landslide since opening this morning. We also delve into the outlook for UK equities and the economy in the months to come.

How has the UK stock market reacted to Labour’s win?

The FTSE 100 climbed 0.45% shortly after markets opened, but has since fallen back and is now pretty much level with where it was at yesterday’s close. The FTSE 250 has posted larger gains, climbing by 1.10% so far today (at the time of writing). 

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“There is always a sense of nervousness ahead of markets opening the day after a general election, but we only get extreme volatility when investors are caught by surprise,” says Dan Coatsworth, investment analyst at AJ Bell.  

He adds: “This time round, there was nothing to get heads spinning as the result was widely expected. Instead, investors appeared to welcome the news with open arms. Political uncertainty is over and this removes one of the key risks around UK equities.” 

Coatsworth also points out that the FTSE 250 has more of a domestic focus than the FTSE 100. This helps to explain its higher return so far today. Many of the companies in the FTSE 100 generate a significant portion of their earnings overseas, which means the index is less exposed to domestic events.

It’s worth mentioning that the UK market still faces other challenges, though, such as remaining significantly undervalued compared to its US and global peers. This has created good opportunities for investors to snap up unloved companies at bargain prices (often while earning a decent amount of dividend income). However, some might be starting to wonder if and when valuations will ever catch up. 

Is a Labour or Conservative government better for the stock market?

This is a question we explored at length in the lead-up to the general election, looking at how UK equities fared under every Prime Minister from Margaret Thatcher to Rishi Sunak. However, in truth, the issue is far more complex than it first seems.

Markets operate in a delicate and complex ecosystem. Performance is dependent on a thousand different variables, from how individual companies are run, to where interest rates are heading and how fast an economy is growing.

As John Stepek, MoneyWeek’s former executive editor, pointed out in a recent newsletter for Bloomberg, “you can’t reasonably compare the 1970s to the 1990s [...] and pretend that the critical variable was the political party in power at the time.”

Economic data is far more influential in moving markets than political decisions, and the prospect of interest rate cuts later this year should do more for equity markets than a change in Prime Minister. It’s also important to remember that markets tend to ‘price events in’ before they actually take place, and Starmer’s victory has not come as any great surprise. 

The good news is that Starmer and Rachel Reeves, tipped to be the next chancellor of the exchequer, have been clear in their support for UK businesses. They have repeatedly said they want to lead a party that is “pro-growth” and “pro-business”, while driving more private investment into UK companies. Labour has also promised to cap corporation tax at its current level of 25% for the next parliament. 

What’s next for the economy under Labour?

As far as the economy is concerned, Starmer has been clear about the fact that his first objective is to deliver economic stability. 

Paul Dales, chief UK economist at Capital Economics, points out that Labour has “pledged to follow very similar fiscal rules to the Conservatives”. This means there’s no real scope for fiscal loosening (i.e. a significant increase in spending or tax cuts). 

However, he adds that Labour will ultimately need to “address what looks like an implausibly low projected path for public spending”, and potentially raise taxes by more than outlined in its manifesto. 

“Our hunch is that Labour won’t rush to address this and will instead persist with current spending plans for 6-12 months,” Dale adds. We should know more once the first Budget has taken place, which could be as soon as mid-September.

It’s also worth mentioning that the shifting macroeconomic environment could give Labour a helping hand. “With inflation now tamed, a Bank of England rate cut fast approaching, [...] and GDP growth improving, the new government will at least start with some tailwinds behind it,” says Jason Hollands, managing director at Bestinvest.

Hollands adds that rates could potentially fall as low as 3% by the end of next year. 

Which sectors could fare well under Labour?

In the lead-up to the election, there was much speculation about what a Labour or Conservative victory could mean for different sectors of the UK stock market. 

In particular, UK housebuilders have been in focus, as both Labour and the Conservatives outlined commitments to build new homes in their election manifestos. Labour has promised 1.5 million. 

This sector has suffered in recent years thanks to higher interest rates, however a shift in the macroeconomic backdrop as interest rates come down could also give housebuilders a lift. 

The Bank of England’s next meeting will take place on 1 August, and most economists are expecting a first cut at either this meeting or the following one in September.

Hollands suggests building materials firms and renewable energy infrastructure companies could also benefit from Labour’s commitment to building new homes and investing in the green economy.