US Stocks May Be Missing Rising Political Risk

US Stocks May Be Missing Rising Political Risk

over 3 years ago2 mins

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The US stock market may have fallen 4% on Thursday after a downbeat update from the country’s central bank – but the share prices of the biggest American companies may be overlooking bigger risks on the political front… 👀

What does this mean?

According to Predictit, the perceived odds of the Democratic Party taking control of the US Senate following November’s elections have almost doubled this year to 56%.

The previously close relationship between the US S&P 500 and the Republican Party’s chances of retaining the White House, meanwhile, has fallen apart in recent weeks. In other words, American stocks have continued rising despite prediction markets suggesting presidential re-election in 2020 looks increasingly less likely.

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That’s raising a few eyebrows. All things equal, a Democratic administration with majorities in both chambers of the US Congress would probably seek to reverse the major tax cuts introduced by Republicans in 2017 – hitting American companies’ earnings 📉

Why should I care?

Closely regulated firms which rake in a higher proportion of their sales for the US – think sectors like utilities, communications, and consumer staples – were particularly big beneficiaries of the tax cuts, and would therefore be particularly bigly hit by their rollback.

But according to investment bank Credit Suisse, even the average S&P 500 company would see profit reduced by more than 5% in 2021 if just half the tax cut was reversed.

Certain sectors would see earnings fall further
Certain sectors would see earnings fall further

US stocks don’t appear to be reflecting the shift in political risk at the moment, potentially creating an opportunity for investors to profit by betting against the market.

Then again, there are plenty of other factors at play. An improving US economy between now and November could boost approval of the Republican presidential incumbent; a clean sweep for the Democrats, meanwhile, could lead to the introduction of economy-supporting policies that mitigate the effect of higher taxes on stock prices. Only time will tell… 😉



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