What Strategists Are Saying About Impact of U.S. Stimulus

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. Barclays 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.