What could a Democratic clean sweep bring for US equities?
Macroeconomic impact will likely be muted, but higher corporate taxes will have modest impact on equities.
Days before the election, the Democrats stand a solid chance of achieving a clean sweep, with Joe Biden winning the presidency and the Democrats recapturing the Senate. Regardless of the exact probability of this event, we think this is the top election outcome that investors should be focusing on, as a Donald Trump win would preserve the status quo and a Biden win without a Democratic Senate would bring legislative gridlock. Biden's platform proposes trillions of dollars of new spending on clean energy, infrastructure, healthcare, education, and other areas.
However, the degree to which these plans can be enacted is highly contingent on the size of a future Senate Democratic majority, as a slim Democratic majority will struggle to coalesce around more sweeping changes.
Furthermore, even assuming a large majority (five-plus seats), we don't think the increase in taxes or spending will push the US to unusually high levels by historical standards. As such, our US GDP forecasts aren't substantially affected by the election outcome.
However, US equities are likely to see a modest negative impact from higher corporate taxes, which could reduce aggregate after-tax earnings on the order of 5 to 10 per cent. Of course, specific companies or sectors could see outsized impact from newly enacted policies.
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