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Mike Wilson, the bank’s chief U.S. equity strategist, said there’s a good chance markets could drop before the election and investors have recently grown complacent about the risks of a drawn-out legal battle between President Donald Trump and Democratic hopeful Joe Biden.
“If the S&P 500 were to go down to 3,100 index points and we didn’t know what was going on with the election yet, we’re going to be adding to risk at that point no matter what,” Wilson said in a phone interview.
That’s because no matter who wins the election, it’s almost a certainty that they’ll unleash more economic stimulus, which would drive asset prices higher, said Wilson, who correctly foresaw the September market pullback.
Morgan Stanley’s expectation is that the election will be decided by the Thanksgiving holiday on Nov. 26, which leaves room for three weeks of uncertainty to rattle markets. Fears over another spike in Covid-19 cases, the unknown timing of a vaccine and stalled stimulus talks are also weighing on investor confidence, Wilson said.
“Markets might get more defensive,” before the election winner is declared, he said. “By the time the outcome is known, stock prices might already be lower.”
Worries over whether Biden will hike corporate taxes are overblown, Wilson said, adding that any increase probably wouldn’t go into effect until 2022 and the administration would prioritize fiscal stimulus. It’s unlikely that Democrats would push through tax legislation before June and a lot depends on the state of the economy, he said.
Raising the corporate tax rate to about 28% would only reduce S&P 500 earnings by about 6%, according to Morgan Stanley. By comparison, Goldman Sachs Group Inc (NYSE:GS). calculates that the profit hit would be roughly 9%.
©2020 Bloomberg L.P.
