The presidential debate between President Trump and Joe Biden left investors with questions. In the final weeks leading up to the election and the control of the Senate still in question, the possibility of a divided government could prevent either party from making major changes according to a team led by Davis Kostin, the chief equity strategist at Goldman Sachs.
They say such an outcome would be the best-case for the S&P 500, causing the index to rise 11% to 3,700 over the near term and to 4,000 by mid-2021.
A Democratic sweep, meanwhile, could have a “modestly positive net impact” on S&P 500 companies’ profits, according to Goldman, but that would depend on the size and shape of tax reform and fiscal stimulus for an economy damaged by the COVID-19 pandemic.
A so-called blue wave might result in the S&P 500 climbing 1.93% to 3,400 in the short term and to 3,800 over the medium term, the strategists said.
Over the near term, the removal of election uncertainty should help reduce equity risk premium while supporting valuations, boosting the S&P 500 to 3,600, an average of the two weighted election probabilities. Equity risk premium is the higher return that investors typically get on stocks compared with securities such as U.S. Treasurys that are widely viewed as carrying little risk of losing money.
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