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Ladies and gentlemen, we have a winner! And a timely reminder that stocks pre-price widely expected election outcomes. Yes, the Labour Party’s landslide in the UK’s election Thursday left markets unfazed despite ample handwringing over tax hikes and other alleged risks. Seems to us stocks digested all this long ago and are now enjoying the falling uncertainty that comes as elections wrap.
Markets move most on surprises, and Labour’s thumping victory was far from a shock. Polls have signaled it for years—since Boris Johnson was still prime minister (PM). They showed it during Liz Truss’s short stint as PM. And they have continued to do so during outgoing PM Rishi Sunak’s tenure. We knew an election was due by early 2025 and most observers thought it would come sooner. Once Sunak put it on the calendar, the only question seemed to be whether a surging Reform Party would siphon enough of the Conservatives’ grassroots support to leave the party with just a few dozen seats.
In the end, Labour won its biggest-ever majority, while the Tories outperformed worst-case-scenario projections. With one seat left to declare, Labour has 411 out of 650, followed by the Tories at 121. After them, we have the centrist Liberal Democrats at 71, the Scottish National Party down to just 9, Reform with 5, the Greens and Welsh nationalists with 4 apiece and the various Northern Irish and other small parties at 24.[i] Sunak moves out of 10 Downing Street, and Labour leader Keir Starmer moves in.
Starmer is one of the most well-known quantities in UK politics. He won the Labour leadership post with a centrist agenda and presided over what some in his party’s grassroots described as a leftist purge. He spent his time as opposition leader courting business support and positioning Labour as the party of growth and fiscal moderation. Labour’s manifesto, on the economic front, mostly extended the status quo from 14 years of Conservative rule.
Some argue this is a fig leaf, and that with such a lopsided majority, Labour is about to push all manner of anti-growth policies on the nation. We have seen warnings that the country is set for a wealth tax, higher inheritance or capital gains taxes, a war on North Sea oil production and other policies that will stymie investment, innovation and growth.
In our view, these warnings are all rooted in bias, not reality. UK investors have long perceived Labour as bad for growth and the Conservatives as pro-market. Reality is a lot more complex. After all, it was a Conservative government that slapped windfall profits taxes on the UK’s Energy sector, hiked corporate taxes (after cutting them earlier in their long rule) and hit households with stealth income tax hikes by not indexing tax bands to inflation. It was also a Conservative government that blocked several housing and industrial construction projects to avoid losing small-town support. This record is why Labour was able to market itself successfully as the party of investment and growth.
Even if some within Labour do push for more radical change, we don’t think passage is a foregone conclusion. The party is a big tent, which makes governing more difficult than winning—something the Conservatives demonstrated after their own 2019 landslide. The Tories ended up leaving most of that manifesto incomplete as intraparty divisions blocked legislation. Labour has similar internal divisions, which started bubbling to the surface well before campaigning got underway.
It also won’t be lost on Starmer that Labour’s win is less about hearty public support than a split conservative vote. While Labour gained more than 200 seats, its total vote share rose by less than 2 percentage points, from about 32% to 33.8%.[ii] Combined, the Conservatives and Reform outpolled it. So the election itself doesn’t seem like a sharp left turn that implies a mandate for major, radical change.
Therefore, we suspect there will be storming debates in Parliament as some Labour members of parliament (MPs) push for more aggressive tax changes while others try to tug legislation to the center in order to avoid alienating voters and becoming a one-term wonder. This would be a recipe for stealthy gridlock, repeating the post-2019 scenario with the parties flipped.
In our view, markets have been pricing this election for a while—the likely results as well as all the chatter and fears surrounding them. Those fears seem baked in. Now, over the foreseeable future, they will price how reality goes relative to those expectations. The relief when the new administration isn’t as disruptive as feared should prove bullish, just as it did in 1997, when markets did a-ok as Tony Blair’s huge Labour majority settled in.
Lastly, Britain may be a physical island, but in markets it isn’t—it is one piece of a big global market that tends to pull all its members along in the same direction much more often than not. Global factors tend to swamp local, and this broad global bull market should pull the UK along regardless of its political changes. Just as we have seen in Germany and Italy in recent years, and just as France is now demonstrating. Markets also have a big dose of falling uncertainty on the horizon later this year, courtesy of the US election. Don’t underestimate these tailwinds.
