Citigroup: Trump win would cause immediate stock drop

Political uncertainty roils Wall Street
Political uncertainty roils Wall Street

A win for Donald Trump in next week's election could take a big bite out U.S. stocks, according to the latest forecast from Citi.

In a note to clients late Thursday, the bank said the S&P 500 will fall by 3% to 5% immediately if Trump is elected. A victory by Hillary Clinton wouldn't move stocks significantly, it predicted.

The outlook is based on the bank's belief that investors would be surprised by a Trump victory, despite the fact that the polls have tightened in the last week. And Wall Street does not like surprises or uncertainty.

"Our September client survey showed that the Street convincingly believes that Hillary Clinton will be the next American president," wrote Tobias Levkovich, Citi's chief U.S. equity analyst. "However, if Donald Trump were to win, that outcome would have been unexpected and thereby may cause a jump in the equity risk premium."

A Trump win also poses a big risk to stocks in the long term, according to the bank, which cites concerns about his policies that aim to restrict international trade.

"We have viewed protectionism as a key threat to profit margins for many years, as companies have taken advantage of global sourcing and transparent pricing via technology," Lekovich wrote. "Any interference could erode not just profits but also the benefits that have accrued to consumers from lower-priced goods and services." There is also a risk to U.S. companies if other countries raise tariffs in response to Trump's policies.

Related: Clinton vs. Trump - Who's better for stocks and jobs?

Citi's forecast is that Clinton still has a 75% chance to win, despite the announcement from FBI Director James Comey that the bureau discovered additional emails that could be related to the bureau's investigation into how Clinton handled classified information.

"Heightened polarization does not bode well for governance, regardless of who wins the election," wrote Tina Fordham, Citi's chief political analyst. "The FBI announcement could increase the risk that if Trump loses he does not accept the result. If a Clinton victory transpires and she presides over a Republican-controlled or divided Congress, the risk of continuous investigations and possible future impeachment is non-negligible."

The Citi forecast is one of the first to come out since the FBI revealed the emails and the polls tightened. The research firm Macroeconomic Advisers forecast in early October that a Trump win would result in an 8% drop in U.S. stocks due to uncertainty about his economic and trade policies. The Brookings Institute projects a 10% to 15% plunge in stocks if Trump wins.

No matter who wins, the day after the election usually tends to be rough for stocks. Bespoke Investments found that the average selloff the next day is about 1%.

-- CNNMoney's Patrick Gillespie and Heather Long contributed to this report

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