President Donald Trump and former vice president Joe Biden are set to make their cases to voters in the first 2020 presidential debate on Tuesday night. Which party eventually wins the White House—and control of Congress—could have a meaningful impact on the stock market and corporate earnings in the future. In a report on Tuesday, a team of
analysts put together their estimates under various election outcomes.
The main policy differences the analysts focused on are corporate tax rates, federal spending, and trade policy. Some of those could work in opposite directions—higher taxes but greater fiscal stimulus under a Democratic-controlled Congress and White House, for instance.
Biden’s platform calls for increasing the corporate tax rate to 28%, from 21% currently—compared with 35% before Tax Cuts and Jobs Act of 2017. Biden has also proposed increasing taxes on global, low-tax, intangible—or GILTI—income. Taken at face value, the Goldman analysts calculate a 9% reduction to
earnings as a result of the Biden corporate tax.
But they expect a more pared-down version of the tax plan to actually become law, which would reduce S&P 500 earnings by 5%, starting gradually in 2022.
In a Democratic sweep scenario, the Goldman analysts expect to see an additional $7 trillion in fiscal spending in coming years, $2 trillion of which could come soon after the election in the form of a coronavirus relief bill. That would boost economic growth and S&P 500 revenue.
“Although government spending would rise by more than tax revenue, from an earnings perspective the impact of tax reform would likely outweigh the impact of fiscal expansion,” wrote David Kostin, Goldman’s chief U.S. equity strategist, on Tuesday. “Taxes are deducted from profits, while fiscal spending and economic activity boost revenues.”
Although less certain, the analysts also expect a modest increase in S&P 500 earnings from a less tariff-focused trade policy against China. “With respect to S&P 500 profits, we model a partial unwind of tariffs in 2021 and a full reversal in 2022, adding roughly 4% to earnings relative to the baseline scenario that assumes no change in policy,” Kostin wrote.
Overall, the analysts calculate higher S&P 500 earnings growth in 2021 and 2022 under a Democratic-controlled Washington, with lower profits starting in 2023 once tax reform potentially kicks in. But the long-term impact isn’t all that large: By 2024, they model just 4% lower S&P 500 earnings per share under a Democratic sweep scenario than if policy is unchanged.
The Goldman analysts expect plenty of other factors to be more important for the direction of the market than what happens on Nov. 3. Those include the pace of the economic recovery, Federal Reserve policy, and the timing of a Covid-19 vaccine and its distribution.
Kostin has a 3600 year-end target for the S&P 500, about 8% above its recent levels near 3300.
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