A Democratic-controlled government may not be as bad for stocks as many warn, Goldman Sachs said.
To date, the Trump presidency has implemented several corporate-friendly measures, including tax cuts in 2017 and various deregulation measures. Some see Trump's second term as a boon to the markets, denouncing a potential Biden presidency and the likely tax reform that will follow.
The strategic team led by David Kostin is less pessimistic about the blue wave and instead predicts a “moderately positive net effect” if Democrats win the November elections. Depending on the timing of tax reform and increased stimulus, the Biden administration could lift stocks and spur a healthy economic recovery, the team wrote on Tuesday.
"A significant increase in budget spending, financed in part by higher tax revenues, will stimulate economic growth and help offset the decline in revenue from higher tax rates," the strategists added.
Goldman Sachs forecast a 4% increase in profits for the S&P 500 through 2024, in line with the policy expected from a democratic takeover. A stripped-down version of Biden's tax proposal will go into effect starting in 2022, and the new trade policy will support corporate profits throughout the former vice president's term.
Overall, the bank expects the S&P 500 to end the year at 3600, up 7.4% over the election period and into 2021. The score reflects the average of Goldman's projections for a democratic take-off and government split. The former sets the immediate target for the benchmark at 3500. The latter scenario reduces some political uncertainty and predicts the S&P 500 will rise to 3700, Goldman said.
However, the election season will take a back seat to other factors affecting the market. Strategists wrote that the pace of the US economic recovery and the policy of the Federal Reserve System will be more important for the valuation of stocks in the coming months than the results of the presidential election. Expectations that low rates will last until 2023 and the resolution of "extremely high uncertainty of the current elections" could bring cautious investors back to the stock market.
Approval of the coronavirus vaccine could also cut equity risk premiums and boost analysts' forecasts to 2021, they said.