Following the Georgia runoffs, anyone whose forecast for the US economy and, relatedly, for asset prices in 2021, was based on D.C. gridlock, had to reevaluate their position.
While it’s true that a razor-thin Senate majority means “transformational” change (so to speak) isn’t in the cards, I’d gently note that, depending on your definition of “transformational,” no such policies were likely in the first place.
Joe Biden isn’t a “transformational” president. He’s a Beltway wall fixture. And, contrary to what you might have read in some RNC mailer, Kamala Harris isn’t a “radical.” She’s a prosecutor. (She’s also on the cover of Vogue this week, by the way.)
So, while you may get another $1,400 at some point, and while America’s beleaguered college grads might get $10,000 shaved off a student debt burden that, on average, is at least triple that, you shouldn’t expect UBI or a federal jobs guarantee. And campaign speeches notwithstanding, something tells me Biden isn’t going to save the environment either, at least not if it means printing $10 trillion.
Of course, that doesn’t mean there aren’t ramifications — elections do have consequences. And, as Goldman wrote last week, the read-through for the US economy from a Democratic-controlled Congress is likely to be positive, with demand-side stimulus outweighing any drag from taxes on the wealthy and corporations.
When it comes to equities, the bank’s David Kostin revised (higher) his already optimistic outlook for profits. The bank now sees S&P 500 EPS growth hitting 31% this year, up from 29%. Earnings will be $178 in 2021 and $196 in 2022, he said.
Kostin, like the bank’s economic team, generally plays down prospective tax hikes. “While candidate Biden proposed raising the statutory federal corporate tax rate from 21% to 28%, we assume a smaller increase in 2022, consistent with our political economists’ expectations of a feasible tax package under a narrow Senate majority,” he wrote.
The fact is, the slimmer your majority, the more beholden you are to the “marginal” member, which means fiscal measures will need to be designed so as to be agreeable to the most fiscally conservative Democrats.
“A market concern around a D-sweep has been the potential for this to lead to major tax or regulatory changes,” Morgan Stanley’s Michael Zezas wrote last week. “We think these concerns are overstated, given the exceptionally narrow Senate majority,” he added, noting that,
The policy difference between the most liberal and conservative Senate Democrat is large; to pass, legislation needs to satisfy both. As such, we expect a focus on items that can satisfy both wings. This ‘plausible policy path’ includes substantial fiscal expansion (with as much as US$1 trillion in additional COVID-19 aid a top priority) but a lighter touch on taxes, used as a partial offset to infrastructure and/or healthcare spending initiatives later in 2021.
In other words, tax hikes are coming, but will likely be smaller than feared, and will in any case take time to materialize.
For Morgan Stanley’s Mike Wilson, the read-through for stocks is dispersion. Sectors and styles that would benefit from higher yields and a steeper curve will be en vogue, while those tethered to the decadeold “duration infatuation” and perpetual bull flattener could suddenly be out of favor. Banks, you’ll recall, just posted a stellar week.
As far as the prospect for higher yields to eventually derail equities of all sorts, Goldman’s Kostin cited high operating leverage and a kind of “rising tide lifts all boats” argument.
“S&P 500 operating leverage is now the highest in a decade,” he said Friday. “Even absent any cost controls, an economic and revenue recovery — benefitting from increased fiscal stimulus and widespread vaccinations — should lead to an even stronger earnings rebound.”