Investment banks have produced reams of research, created complex models and scrutinised polls in an attempt to predict exactly how the US election will reshape the country’s stock market.
French bank BNP Paribas this week went a step further, hosting the well known statistician Nate Silver of the FiveThirtyEight political website for a “fireside chat” with its clients.
It is the latest offering for investors and traders weighing up what Wall Street will look like in the days and months after one of the most hotly contested elections in modern American history.
The advice and trade recommendations have covered every area of the market. They have shifted in recent weeks to reflect heightening investor expectations of a “blue wave” in which Joe Biden beats Donald Trump for the presidency and Democrats take control of Congress.
1. Taxes
Cutting the corporate tax rate from 35 per cent to 21 per cent was one of Mr Trump’s hallmark policy achievements. It provided a boost to American companies’ profits and spurred a rise in share buybacks that have in turn helped support the equities market.
Democratic hopeful Mr Biden wants to increase the corporate tax rate to 28 per cent, still lower than the 35 per cent rate from when Mr Trump took office. Mr Biden has also proposed other changes to US tax policy.
Taxes would be the “most direct consequence of a Democratic sweep” for profits of companies listed on America’s benchmark S&P 500 index, according to Goldman Sachs.
The Wall Street bank estimates that if all of Mr Biden’s tax proposals were implemented, it would reduce S&P 500 earnings by 9 per cent, “excluding any potential second-order impact from economic growth, business confidence, or other factors”.
Stocks that would take the heaviest hit would be those that were the biggest winners from Mr Trump’s cuts including AT&T, credit card provider Discover Financial and hotel operator Hilton Worldwide, according to JPMorgan Chase. Strategists at Société Générale warned that groups with weak credit quality and low effective tax rates could be especially vulnerable, highlighting drugstore chain Walgreens Boots Alliance and General Motors.
Still, many research houses expect Mr Biden’s tax proposals would ultimately morph markedly before they are implemented, reducing the overall impact on the stock market.
“It is worth noting that the tax rate has been drifting lower since the 1960s, and it would require significant political will to push tax rates significantly higher,” JPMorgan strategists said. “In other words, headline risk might be greater than actual policy, similar to many scares that have come before it.”
2. Infrastructure
If Mr Biden is victorious, investors expect a large boost to infrastructure spending as Democrats look to fund their own Hoover Dam-esque projects. It could lift stock prices and help to offset increased corporate taxes that Democrats plan to pursue, analysts say.
“A large increase in fiscal spending, funded in part by increased tax revenue, would boost economic growth and help offset the earnings headwind from high tax rates,” Goldman strategist David Kostin said.
That would benefit companies in the construction industry, including Caterpillar, Martin Marietta Materials and Jacobs Engineering, according to JPMorgan. Strategists at Société Générale say an infrastructure boost would also extend to utilities — which would power these new projects and the manufacturers benefiting from increased US output — and railroads such as CSX and Norfolk Southern.
Michael Mullaney, global head of research for Boston Partners, said that Mr Biden’s infrastructure spending plans would provide a large boost to the economy that would “have a much bigger fiscal multiplier than anything Trump has put on the table to date”.
3. Tech regulation
Big technology groups including Google, Alphabet and Facebook have come to dominate the US stock market; along with Apple and Microsoft they account for more than a fifth of the S&P 500. It is why calls to more closely regulate or even to split some of the groups in two have been followed so closely by investors.
Tech companies have already increased their spending on lobbying efforts, knowing sweeping changes could soon arrive, regardless of whether a Democratic or Republican president is in the White House. Democrats, including Elizabeth Warren, have called for Amazon and others to be broken up. Yet it was the Trump administration which fired a warning shot this October, when the Department of Justice sued Google for antitrust violations.
“When companies begin to dominate, people get afraid of their power,” said Lee Spelman, head of US equity for JPMorgan Asset Management.
Companies with user generated content, including Twitter, Facebook, Pinterest and Snapchat, are also in the crosshairs of policymakers in Washington. Société Générale strategists say the stocks of those companies could be in for a rude awakening if Mr Biden is elected.
4. Energy
Stark differences in each candidates’ energy policy are also expected to have a significant effect on America’s stock market.
The election comes as energy groups are in the throes of a painful period caused by the fall in oil prices, the coronavirus crisis and the global transition towards cleaner forms of energy.
The S&P 500 integrated oil & gas index, which includes oil majors ExxonMobil and Chevron, has tumbled 50 per cent since the start of 2020.
Strategas, a boutique research and advisory group, said a Trump victory next week would be a boon to the sector. In addition to supporting energy tax subsidies and rolling back clean air emission standards, Mr Trump has also backed the use of federal lands and waters for drilling.
In contrast, Mr Biden has pledged to “transition away from the oil industry” and has also outlined a plan to spend $2tn within his first four years in office to cut carbon emissions and electrify the transportation sector, among other initiatives.
Strategas said the stocks of solar and wind energy providers like First Solar and Renewable Energy Group would prosper as a result.
Eliminating subsidies to oil and gas companies and a ban on fracking on federal land would deal a further blow to traditional energy groups, analysts say. Société Générale warned that meant shale drillers like Occidental and EOG Resources faced the biggest risks.
