Goldman’s election scenario probabilities and how S&P 500 will react

Goldman Sachs has modeled out some election outcomes, along with how the S & P 500 will react, ahead of the results. The Wall Street firm outlined four possible scenarios for the U.S. presidential election, and what it could mean for stocks, in a close race between former President Donald Trump and Vice President Kamala Harris. Also at stake is control of Congress, as a sweep from either the Republicans and Democrats could mean a drastic overhaul of tax and spending policies that could affect corporations, and how investors invest going forward. For investors, what is clear is that volatility will be heightened, with the volatility market pricing in a 1.91 percentage point move for the S & P 500 through Wednesday’s close, Goldman’s note read. Even so, the firm expects any uncertainty will soon give way to optimism. “We expect a relief rally with all benchmarks up at the end of the week,” read a Monday note from the firm’s trading desk. “We notice investors are waiting to add chips to the table, businesses are ready to make decisions, election uncertainty out of the way will be risk positive.” Here are the scenarios. Trump wins and Republicans sweep A 25% likelihood, with the S & P 500 set to rise 3%. A Trump victory, and a Republican sweep, will mean the S & P 500 could rally 3% immediately afterward. Within sectors, this outcome will be especially beneficial to financial stocks, with regional banks set to pop 3% in a Trump win, the firm said. Domestic cyclical names will outperform global exporters. Meanwhile, the Nasdaq will do well, but may have a “skinnier rally” than previously expected, the note read. Trump wins, but the government is divided A 30% likelihood, with the S & P 500 set to gain 1.5%. This scenario will still be positive for markets, with the S & P 500 set to gain 1.5% afterward, the note read. In this event, a lower 10-year Treasury yield could outweigh the risk of more fiscal debt. “Event risk out of the way and lower 10yr yield will trump (no pun intended) the negative on fiscal, but it likely means the stock market’s rally is short-lived,” the note read. “Tariffs and de-regulation still happen, more fiscal becomes quite difficult but long-term rates likely decline to reflect less fiscal.” Harris wins and Democrats sweep A 5% likelihood, with the S & P 500 set to fall 3%. This scenario is the least likely to come to fruition, according to Goldman Sachs, which assigned just a 5% probability to the outcome. A Harris win, with Democratic control of Congress, could mean a 3% pullback in the S & P 500 as investors worry about the possibility of greater corporate taxes. “A Democratic Sweep opens up the possibility that corporate taxes could be raised from 21% to 28%, but this will be difficult with a very small majority as it was in 2020. Similarly, de-regulation theme loses momentum in a Harris Sweep outcome,” read the note. “The combination of this is risk-negative, but somewhat offset by event being out of the way and lower rates/weaker dollar.” Harris wins, but the government is divided A 40% probability, with the S & P 500 to fall 1.5% This scenario has the greatest likelihood to come true of the four possible election outcomes. However, investors could step in and buy the dip on the S & P 500, the firm said. “S & P’s knee jerk dip likely gets bought as lower rates, weaker dollar, and less volatility could lessen the sting of less de-regulation and animal spirits associated with a Trump victory,” the note read. “Harris w/ Divided congress should benefit consensus crowded areas of the market.” Secular growth stocks will likely outperform, as will the Nasdaq, in this scenario. Renewable stocks could surge 6.8%, the firm said. Chinese and global exporters are set to be big winners here, as would defensives over cyclicals.