{"id":7957,"date":"2020-11-16T10:37:10","date_gmt":"2020-11-16T15:37:10","guid":{"rendered":"https:\/\/www.zacksim.com\/?p=7957"},"modified":"2022-02-27T17:54:32","modified_gmt":"2022-02-27T17:54:32","slug":"post-election-outlook-stocks","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/post-election-outlook-stocks\/","title":{"rendered":"The Post-Election Outlook for Stocks"},"content":{"rendered":"

The election that consumed the American public (and the world) \u2013 and also fueled the largest voter turnout in American history \u2013 is now over. I won\u2019t get into the weeds on the possible legal challenges to the outcome, and whether they are likely to be successful or not. I\u2019ll focus instead on what\u2019s next for equity markets, assuming the current election result stands.<\/p>\n

For its part, the stock market appeared to be unfazed by the swirling uncertainty of the last two weeks. During election week, the S&P 500 clocked its biggest weekly gain since the early days of the new bull market, posting a stout +7.3% gain. For all the commentary about downside volatility surrounding a contested election, the stock market defied expectations \u2013 as it often does.<\/p>\n

The stock market is arguably looking ahead to a post-pandemic economy and a Biden administration with a divided Congress. In 46 years when power was split between the White House and Congress, the average S&P 500 return was +7.26%. Interestingly, for investors looking for historical stock market data under a Democratic president, a Republican Senate, and a Democratic House, you won\u2019t find any \u2013 this division of power has not occurred since 1886<\/em>.1<\/sup><\/p>\n

Wall Street may also be pricing-in some of the policy constraints a Biden administration may face with a divided Congress. In particular, there appears to be little chance we will see corporate and capital gains tax increases in at least the next two years, but perhaps for Biden\u2019s entire term. Any prospect of sweeping legislation that could change property rights or fundamentally alter a sector \u2013 like Energy and Health Care \u2013 also appear low.<\/p>\n

Meanwhile, the prospect of more fiscal stimulus has risen, as Biden has a history of bi-partisan cooperation and both parties agree on the need for more spending (though the amounts vary greatly). The next few years may also feature an ease to trade tensions across the world, and more cooperation with allies in foreign policy affairs. We do not expect any change to monetary policy.<\/p>\n

Don\u2019t Forget About the Most Important Stock Market Driver<\/strong><\/p>\n

With all of the focus on the election and policy, perhaps the most important driver of stock market returns over the long-term \u2013 corporate earnings \u2013 has received very little attention. But that\u2019s a mistake, in my view. I would argue a great deal of the stock market\u2019s recent strength has been driven by earnings.<\/p>\n

We now have Q3 earnings results from 447 S&P 500 members (as of November 6), with total earnings for these companies down -7.3% from the same period last year on -1.9% lower revenues. 2<\/sup> Readers may note the negative performance and wonder how these results can be good. But what matters most with earnings, in our view, is whether a large share of companies are exceeding expectations.<\/p>\n

They are! Of the 447 reporting companies, 85.2% of them beat earnings-per-share (EPS) estimates, and 76.3% beat revenue estimates. If 86% ends up being the final percentage of companies exceeding EPS expectations, it will mark the biggest positive EPS surprise since 2008. This metric is a big deal, in my view.<\/p>\n

Looking ahead, estimates for Q4 earnings continue to move higher, as corporate America proves more resilient in the pandemic than just about every analyst anticipated.<\/p>\n

\"\"<\/p>\n

When it comes to the stock market and earnings, the operative phrase is \u201cbetter than expected.\u201d And that\u2019s what we\u2019re seeing now.<\/p>\n

Bottom Line for Investors <\/strong><\/p>\n

The stock market may also be responding to positive news related to the vaccine. According to reports last week, Pfizer\u2019s vaccine candidate was more than 90% effective in preventing participants from contracting Covid-19 \u2013 a very good early sign. Though we are still likely months away from having a vaccine widely available, the light at the end of this pandemic\u2019s tunnel is increasingly visible, in my view.<\/p>\n

Stocks have somewhat of a hurdle to climb in the coming year to keep moving higher. As it stands today, the S&P 500 trades at a forward 12-month multiple of 21.6x. This valuation is well above the 10-year average of 15.5x, but as I\u2019ve written before, near-zero interest rates arguably give valuations more wiggle room to the upside. If corporate earnings can catch up in the coming quarters, this bull market may have plenty of room to run.3<\/sup><\/p>\n","protected":false},"excerpt":{"rendered":"

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