The S&P 500 could fall 10% on tax-hike fears if Democrats win both Georgia run-off elections, says one chief investment strategist

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• The S&P 500 could fall up to 10% if Democrats flip the Senate on Tuesday, said Oppenheimer’s John Stoltzfus. 
• “Increased uncertainty over taxes and spending could likely weigh on the equity market at least until the intentions of the Biden Administration are given greater definition as to what a new tax regime might look like and how much any expansion of the government and its services would cost,” said the chief investment strategist. 
• Stoltzfus added that it appears to him that the market has priced in a Republican victory in at least one of the two Georgia run-off elections.
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The S&P 500 could fall up to 10% if Democrats flip the Senate blue on Tuesday, said Oppenheimer’s John Stoltzfus. 

The chief investment strategist said in a note to clients on Monday that investors may be spooked by the prospect of rising corporate taxes and government spending under a Democratic administration and Congress. 

“Increased uncertainty over taxes and spending could likely weigh on the equity market at least until the intentions of the Biden Administration are given greater definition as to what a new tax regime might look like and how much any expansion of the government and its services would cost,”said Stoltzfus. 

The results of the two Georgia Senate races will determine whether or not Republicans remain in control of the upper chamber. Stoltzfus said markets prefer divided government, so that Washington has enough checks and balances in place to keep power out of just one party’s hands. 

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The investment strategist added that it appears to him that the market has priced in a Republican victory in at least one of the two elections, and if that doesn’t occur, a drawdown between 6% and 10% for the benchmark index could take place.

A Democratic Congress may reform tax legislation and it’s uncertain how that would affect businesses. The Tax Reform Act of 2018 enabled corporations to keep more of what they earned after taxes, which has been considered good for research and development as well as hiring, and supporting dividends for many companies through the pandemic, said Stoltzfus.

Stoltzfus also said that a Democratic sweep in Georgia could result in a boost in new government program creation and spending. That would come at a time when “many voters, market participants and business leaders are concerned about the sizeable level of debt that the Treasury has had to take on to provide a financial “bridge over troubled water” via fiscal stimulus to help individuals and businesses stay afloat during these trying times of Covid-19,” Stoltzfus said.

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