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Historically, when a party change in the White House is expected, the S&P 500 shows weakness through September and October 1, and we believe this season will be no exception. However, the main factor driving market sentiment through fall is the path of COVID-19 and the expected timing of a vaccine. If we avoid an unmanageable second wave of the virus, market participants will likely focus more closely on hot button topics of taxes, law enforcement, unemployment and 2021 fiscal stimulus.
Predicting the effects of election outcomes is more straightforward for some sectors than others, and if the last election was any guide, the consensus view of broad market reactions can be wildly off-base. The sectors we expect to be most susceptible to election volatility are Health Care (affected by messaging around drug pricing and affordable access to care) and Technology (affected by messaging around trade and privacy regulations, likely to come from both candidates).
Although the Presidential race is certainly one of consequence, the Congressional election arguably has the potential for as much, if not more, impact on markets going forward. Fiercely contested issues such as corporate tax levels, health care and fiscal spending through the recovery are items that require Congressional support and face stark party divisions.
A major policy difference concerns the corporate tax rate. Right now estimates for the 2021 S&P earnings are $165. Everything else being equal, an increase of the corporate tax rate from the current 21% to 28% would shave SPX1 earnings by 10%, meaning the new baseline is roughly $149. That is a top line result and the companies which pay the full corporate rate will be more affected than those that pay a lesser rate.
In order to implement a new corporate tax rate though, a Biden administration would need Congress and presumably a Democratic Senate because tax law can only be passed by Congress. There may be some partial counterweights to higher rates in a Biden administration in that the removal of China tariffs could help offset some of the hit to corporate profitability that would come from higher taxes.
Trade policy is controlled by the administration without the need for Congress to act. If all tariffs were removed, an estimated $9 per share would be added back, for a net earnings expectation of $158 per share for 2021.
1 S&P 500 Index
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