Forget Biden Blue Wave and Trump Train – here’s the real winner that will drive stocks

Unexpected resilience of corporate profits points to recovery for the US

Worries about the impact of the US presidential election on equities are overblown – the real market mover next year is whatever drives the economic recovery from the coronavirus pandemic, analysts at investment bank UBS said.

“We believe the continued economic recovery from the pandemic will be the dominant market driver in 2021, while policy clarity, a new round of stimulus, and a successful vaccine should propel the market in the near term,” a 15 October client note from Mark Haefele, chief investment officer global wealth management at UBS said.

Short-term volatility will probably continue, however, with uncertainties such as the timing of a coronavirus vaccine, the timing of extra fiscal stimulus and the election all being likely to cause market jitters, UBS said.

The bank’s analysts said the unexpected resilience of US corporate profits had given it faith in the recovery of the US economy. Second-quarter results that exceeded analyst expectations by more than 20% and strong third-quarter results from banking giants Citigroup and JPMorgan were encouraging.

“Aggregate earnings are coming in 23% better than expected and sales are beating by 5%, very similar to the results in the second quarter,” UBS said. Housing and consumer activity is improving along with car sales, while semiconductor companies are benefiting from car manufacturing.

“Overall we expect 3Q earnings to decline by about 15–17% y/y, an improvement from the 32% decline in 2Q,” the bank said.

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Stocks are likely to weather the elections, the bank said: “We expect stocks to continue to move higher regardless of the election outcome.”

Overall it said that regardless of who wins next month, the economic rejuvenation from the shutdowns of March and April would be the main factor moving equity markets next year.

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The bank said higher taxes in the event of a Biden victory would be likely balanced by government spending on Democrat priorities such as infrastructure, green-energy incentives and extended healthcare coverage.

“We believe Joe Biden’s agenda in a Blue Wave scenario would boost economic growth because new government spending would outweigh higher taxes,” the note said.

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The bank said it had raised its S&P 500 earnings-per-share estimates for this year and next to $130 and $165, respectively.

The note said investors should add some cyclical and value stocks to their portfolio to get in position “for the market’s next leg up”.

The analysts tipped financials, industrials and mid-caps in the US as well as UK stocks and emerging-market value stocks as investments to focus on.

This article was originally posted by Financial News.