A Democratic sweep could have a ‘modestly positive’ impact on corporate earnings, Goldman Sachs says


Joe Biden
Joe Biden


  • A Democratic sweep in November could yield unexpected benefits for corporate profitability and stock investors, Goldman Sachs said Tuesday.
  • Strategists led by David Kostin see “a modestly positive net impact” pushing S&P 500 earnings higher should Democrats take control of the government.
  • Boosted fiscal spending would drive economic growth and “help offset the earnings headwind from higher tax rates,” the team said.
  • A Democratic sweep could lift the benchmark index to 3,500 in the near-term, while a divided government would push it as high as 3,700, according to the bank’s forecast.
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A Democratic-controlled government may not be as bad for stocks as many warn, according to Goldman Sachs.

The Trump presidency has so far delivered several corporate-friendly policies, including the 2017 tax cut and various deregulation efforts. Some view a second Trump term as a boon for markets while decrying a potential Biden presidency and the likely tax reform that would follow.

The team of strategists led by David Kostin aren’t as pessimistic toward a blue wave, and instead forecast “a modestly positive net impact” should Democrats sweep the November elections. Depending on the timing of tax reform and increased stimulus, a Biden administration could lift stocks and drive a healthy economic rebound, the team wrote in a Tuesday note.

“A large increase in fiscal spending, funded in part by increased tax revenue, would boost economic growth and help offset the earnings headwind from higher tax rates,” the strategists added.

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Goldman Sachs projected a 4% increase in S&P 500 earnings through 2024 under policies expected from a Democratic sweep. A “pared-down” version of Biden’s tax proposal would be enacted starting in 2022, and new trade policies would buttress corporate profits throughout the former vice president’s term.

In all, the bank expects the S&P 500 to close out the year at 3,600, implying a 7.4% gain through election season and into 2021. The estimate reflects an average of Goldman’s forecasts for a Democratic sweep and a divided government. The former sets a near-term target of 3,500 for the benchmark index. The latter scenario reduces some political uncertainties and sees the S&P 500 climbing to 3,700, Goldman said.

Still, election season will take a back seat to other market-moving factors. The pace of the US economic recovery and Federal Reserve policy will be more important to stock valuations in the coming months than the presidential election’s outcome, the strategists wrote. Expectations for low rates to last through 2023 anchored yields, and the resolution of “extraordinarily high current election uncertainty” can pull wary investors back into the stock market.

Approval of a coronavirus vaccine could also cut into equity risk premiums and lift analysts’ earnings forecasts through 2021, they added.

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