(Bloomberg) -- Wall Street strategists are going all-in on reflation bets that powered global markets through last week’s U.S. political mayhem and the spreading pandemic.
Thank the prospect of narrow Democratic control of the Senate, which is spurring investment banks to raise projections on spending, inflation and growth.
Among the takes: Saxo Capital Markets Pte says it’s game-on for trillions in green infrastructure. JPMorgan Chase & Co. sees a stronger dollar. Goldman Sachs Group Inc. is betting on higher yields. Barcalys Plc warns the more progressive policies may still struggle to secure legislative support.
Here’s what market watchers are saying about potential stimulus and its cross-asset impact:
Boosting Target
“Democratic control of Washington, D.C. after January 20th will bring greater fiscal spending, faster GDP growth, more inflation, and higher interest rates than we had previously assumed,” Goldman strategists led by David Kostin wrote in a note Friday. “We raise our 2021 S&P 500 earning-per-share growth rate by 2 percentage points to 31% (to $178). But an increase in corporate tax rates will trim 2022 EPS growth by a net 2 percentage points to 10% (to $196).”
“The benefit of slightly higher EPS is offset by modestly higher bond yields, which will limit absolute price/earnings multiple expansion at 22x,” they added. “Our year-end 2021 S&P 500 target remains 4,300.”
Bringing Continuity
“The policy implications of a one-vote majority should bring more continuity than disruption to the 2021 consensus,” JPMorgan strategists led by John Normand wrote Friday. “Under a unified government, the late December stimulus package of $900 billion should be matched by another $900 billion in early 2021. We also assume that tax hikes will be token given a fragile economy.”
“The disruption is potentially through higher inflation expectations, higher bonds yields and a stronger dollar, which upends the emerging-market component of value rotation within equities as well as the most compelling mean-reversion opportunity within fixed income,” they said.
Infrastructure Plans
“A Blue Wave increases the likelihood of an immediate $1 trillion Covid stimulus and $2 trillion to $4 trillion infrastructure spending package later in 2021,” Bank of America Corp. research head Candace Browning wrote in a note Sunday outlining the firm’s recommendations. “Mark Cabana warns stimulus could further pressure the dollar and cause Fed tapering to begin later this year. An early Fed taper creates upside risks to our year-end 1.5% 10-year Treasury target and supports our longer-term expectations for neutral rates moving toward 3%. As a result of the outlook for further stimulus, Savita Subramanian moves the industrial sector to overweight and reiterates her top sector picks of finance and energy.”
‘Goliath and Epic’
The “slow-motion” Blue Wave is “truly Goliath and epic in every way,” said Kay Van-Petersen, global macro strategist at Saxo. “With Harris to break the 50/50 potential Tie in the Senate, about $7 trillion in Green Infrastructure that Biden and Harris campaigned on has risen several magnitudes in not just probability but scope.”
“We are not saying the full $7 trillion will come into fruition, it could actually be more -- but even if it’s ‘only’ $3.5 trillion the ripples are huge and we once again add onto the reflexivity of not enough assets and too much money,” he said.
Extra $1 Trillion
“The moderate Blue Wave scenario is back in the picture, and markets reacted in a risk-on manner, reflecting a perceived higher likelihood of a large stimulus package in the U.S.,” Barclays strategists including Lhamsuren Sharavdemberel wrote in a note. “We expect an additional fiscal package of $1 trillion in size, but a 50-50 split in the Senate seems unlikely to bring large policy shifts, as moderate Democrats may not support progressive initiatives and tax hikes.”
Constructive
The Democratic victory in Georgia “paves the way for President-elect Joe Biden to push for fiscal stimulus bigger than the $900 billion program approved in December last year,” said DBS Bank Ltd. Chief Investment Officer Hou Wey Fook in a note Monday. “In the longer run, more spending will also likely be allocated for the infrastructure space.”
“While higher fiscal will eventually be funded by higher taxation, the impact on U.S. corporate earnings will be negligible. Our constructive view stays,” he added.
Pent-Up Demand
“With the Democrats taking control of the Senate, hopes of further fiscal stimulus have risen (we expect an additional US$1 trillion for Covid-19 aid in the near term and further health-care/infrastructure spending initiatives later in 2021), along with prospects for an even stronger recovery,” Morgan Stanley economist Chetan Ahya wrote on Sunday, adding that “if the supply side is more flexible than we think, it may help to keep inflation at bay but risks stoking asset bubbles. In that case, financial stability would outweigh price stability concerns.”