Why Corporate Profits—Not Politics—Is Key For Stock Market Performance

The SPDR S&P 500 ETF Trust SPY is now up 4.4% in the two days since Election Day, but Bank of America analyst Savita Subramanian says that corporate profits, not politics, are key to where the S&P 500 heads in the long-term.

“The corporate profits cycle has played a much stronger explanatory role in the performance of markets than the presidential party or congressional make-up,” Subramanian wrote in a note.

At the same time, Bank of America will closely monitor any policy changes in Washington that could impact corporate profits. Any legislation that would affect GDP, inflation and interest rates would potentially move the markets, Subramanian said.

See Also: 30 Stocks And ETFs To Watch After 2020 Election Day

Blue Wave Off The Table: In the meantime, the “blue wave” election scenario appears to be getting priced out of the market this week. Subramanian said much of the two-day rally may be in response to a significantly lower probability of higher taxes and increased corporate regulation under a Democratic Senate.

Sectors such as technology, communication services and health care would have been hit hardest by higher taxes. Energy and commodities are likely experiencing a relief rally on the regulation front.

Subramanian said a split White House and Congress has historically been a bullish situation for stocks. In the likely event of a Biden victory and a Republican-controlled Senate, Subramanian speculated that Americans could get a smaller stimulus package than they would if Trump pulled out the victory.

Benzinga’s Take: It may seem counterintuitive that gridlock in Washington is good for the stock market. However, a divided Congress and White House virtually eliminates the possibility of the most extreme policy measures on both sides of the political aisle and gives companies the confidence they need to make long-term investment and strategy decisions.