We expect a muted stock market reaction from the President's withdrawal from the 2024 Election as it was widely expected. The fact that Biden endorsed Kamala Harris reduces uncertainty. There may be a small unwinding of the Trump trade on Monday as Vice President Harris is perceived to have a slightly better chance of winning with CBS publishing a poll Friday that showed Harris trailing 51/48 vs. Biden at 52/48.
We continue to believe that the conclusion of the election will be a positive catalyst for the market as it reduces uncertainty. The biggest risk to the stock market is a democratic sweep leading to a large corporate tax increase. Given the disarray in the democratic party and the favorable Republican math in the Senate, the chance of a democratic sweep seems very unlikely at this point, which is a big positive for the stock market and economic growth.
Corporate tax rates are 60% inversely correlated with economic growth globally. In addition, stock prices are directly impacted by corporate taxes as an increase in the rate will cause a similar drop in earnings and projected earnings growth will also be impacted as a higher rate lowers the expected return on future investments. We estimate an increase in the corporate rate to 30% would cause a 20% drop in stock prices over time.
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