The second round election for two U.S. Senate seats in Georgia next Tuesday has the potential to inject volatility into a high-flying stock market that, for the most part, has seemed past political turmoil in Washington this year. year.
Market participants say any complacency among investors could be diverted, as if Democrats win both Senate seats, the incoming administration of President-elect Joe Biden would have control of both houses of Congress and could happen. to reverse the 2017 corporate tax cuts by putting some pressure on corporate earnings and stock prices.
However, a democratic victory could also boost action by raising expectations of more aggressive fiscal stimulus measures next year, in addition to the billions of dollars already deployed by Congress.
These are the reasons why Georgia’s second-round election could become a “big problem” for Wall Street, Michael Reynolds, an investment strategy officer at Glenmede, said in an interview.
“If we get a shot at the arm with a bigger tax package, we need to balance it with the specter of raising corporate tax rates,” Reynolds said.
Most analysts predict a victory for incumbent Republican senators in Georgia, and the PredictIt betting market gives Republicans a 65% chance of staying at the helm of the Senate starting Thursday.
But Democratic challenger Rev. Raphael Warnock leads Republican Sen. Kelly Loeffler by 1.8 percentage points in a moving average of RealClearPolitics polls for one of Georgia’s qualifiers. And in the average CPR poll for the other Georgia contest, Democrat Jon Ossoff is ahead of Republican Party Sen. David Perdue by 0.8 percentage points.
Read: Betting Markets Win Republicans in Georgia’s Crucial Runoff, Polls Give Democrats Lead
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So the outcome of the January 5 deletions could generate volatility in a sparkling stock market that many investors consider to have prepared in most of the good news, including the launch of the coronavirus vaccine, more fiscal stimulus and a new economic recovery in 2021.
In particular, the risk of higher tax rates for companies could upset investors’ accumulated expectations about a rebound in profit growth next year.
According to FactSet data, the profits of the S&P 500 SPX index companies,
It is expected to rise 22.1% next year, after falling 13.6% in 2020, which would mean the biggest year-over-year jump in earnings in a decade.
“We can’t reserve these earnings expectations right now. They shouldn’t be taken as gospel,” Reynolds said.
But others are more skeptical about whether Senate qualifiers have the potential to generate volatility in the stock market.
They even argue that if Democrats get a narrow majority in the Senate, a Biden administration can still struggle to get ahead with more ambitious points on the political agenda.
In fact, gathering the votes needed to increase levies on businesses could be a difficult task, much more than approving a new tax relief package, said Nomura chief economist Lewis Alexander, who anticipated that the corporate tax rate would remain at 21%.
That’s why some believe the recent market downturn in next week’s election reflects that investors expected few legislative surprises, even if Democrats won both Senate seats in Georgia.
The Dow Jones Industrial Average DJIA,
gained 7.25% in 2020, while the S & P500 SPX index,
finished 16.26% and the Nasdaq Composite COMP,
gained 43.64%.
“It’s hard to imagine moderate Democrats side with progressives to change filibuster rules or stack the Supreme Court,” Michael Arone, chief strategist at State Street Global Advisors, told MarketWatch.
Looking to the future, in the first week of the new year, investors will face a busy economic situation. ISM manufacturing and services indicators for December, weekly unemployment benefit claims, the November trade deficit and, most importantly, the official December employment report will be released next week.
There are few companies announcing their profits next week. However, Micron Technology MU,
Walgreens Boot Alliance WBA,
Constellation Brands STZ,
Bed, Bath and Beyond BBBY,
are some of the companies that will report the results.