Preliminary elections for two seats in the US Senate in Georgia on Tuesday have the potential to inject volatility into a high-flying stock market, which has seen most of the political turmoil in Washington this year.
Market participants say any investor complacency could be shifted, because if Democrats win both seats in the Senate, then the administration of incumbent President Joe Biden would have control of both houses of Congress and could reverse the 2017 corporate tax cuts. , putting the company’s earnings and stock prices under some pressure.
However, a democratic victory could also spur action by raising expectations for more aggressive fiscal stimulus measures next year, in addition to the billions of dollars already spent by Congress.
That’s why Georgia’s election could turn into a “big deal” for Wall Street, said Michael Reynolds, an investment strategy officer at Glenmede, in an interview.
“If we get a blow to the arm with a bigger tax package, you have to balance them with the specter of rising corporate tax rates,” Reynolds said.
Most analysts predict a victory for Georgia’s Republican senators, and the PredictIt betting market gives Republicans a 65% chance of remaining in the Senate leadership starting Thursday.
But the provocative Democrat, Rev. Raphael Warnock leads Republican Sen. Kelly Loeffler with 1.8 percentage points in a moving average of RealClearPolitics polls for one of Georgia’s eliminations. And in the average CPR polls for Georgia’s other contest, Democrat Jon Ossoff is 0.8 percentage points ahead of GOP Sen. David Perdue.
Read: Betting Markets See Republicans Win in Georgia’s Essential Eliminations, While Polls Give Democrats Lead
See: Trump plans to campaign Monday in Georgia County with low turnout
So the result of the January 5 leaks could generate volatility in a frothy stock market, which many investors believe has ripped through most of the good news, including the launch of a coronavirus vaccine, more fiscal stimulus and an additional economic recovery in 2021.
In particular, the risk of higher corporate tax rates could offset investors’ dampened expectations for a return to earnings growth next year.
According to FactSet data, earnings for S&P 500 SPX index companies,
it is estimated to increase by 22.1% next year, after falling by 13.6% in 2020, which would mark the biggest year-over-year jump in earnings in the last decade.
“We cannot reserve these earnings expectations right now. They should not be taken as gospel, “Reynolds said.
But others are more skeptical that Senate eliminations have the potential to generate stock market volatility.
They argue that even if Democrats gain a weak majority in the Senate, a Biden administration could still struggle to move forward with more ambitious points on the political agenda.
Indeed, pooling the votes needed to raise corporate taxes could prove a daunting task, far more so than adopting a new tax-exemption package, said Nomura chief economist Lewis Alexander, who anticipated that the corporate tax rate will remain at 21%.
That’s why some believe the market setback that took place in next week’s poll reflects how investors expected few legislative surprises even though Democrats won both seats in the Senate in Georgia.
Dow Jones Industrial Average DJIA,
gained 7.25% in 2020, while the S & P500 SPX index,
finished with 16.26% and Nasdaq Composite COMP,
gained 43.64%.
“It’s hard to imagine moderate Democrats joining the Progressives to change filibuster rules or stockpile the Supreme Court,” Michael Arone, chief strategist at State Street Global Advisors, told MarketWatch.
Looking to the future, investors will face a congested economic problem in the first week of the new year. ISM production and services indicators for December, weekly unemployment claims, the November trade deficit and, most importantly, the official employment report for December will be published next week.
Few companies are ready to announce their earnings next week. However, Micron Technology MU,
Walgreens Boot Alliance WBA,
Constellation Brands STZ,
Bed, Bath and Beyond BBBY,
is among the companies that will report the results.