Morning Notes — SPX Targets Given Election Outcomes

Any election scenario that doesn’t involve a weeks-long contested outcome should result in an initial equity market rally.  Rotation into cyclical/value sectors at the expense of Tech is  more likely under the Democrat sweep scenario, while other scenarios probably result in a more broad advance.  Financials (regional banks and insurance) is our favorite of the cyclical/value sectors.  Expect higher bond yields and curve steepening in H1’21 regardless of the election outcome.  Again, this favors cyclical/value sectors over Tech (see next paragraph).  Our final look at election outcomes in order of likelihood according to polling data: 1) Democrat sweep – could result in near-term upside to ~3400 on increased fiscal spending expectations, but neutral to negative over the intermediate term with initial downside to technical support at ~2950 or lower depending on the details of the spending package.  With this scenario, you also have to consider a possible economic drag from a more aggressive Federal COVID response and long-term headwinds from expected tax rate increases and regulatory burden; 2) Biden/GOP Senate – likely considered market friendly in the near-term and long-term as it de-risks the impact from higher taxes and regulations.  SPX upside to ~3650; 3) Trump/Democrat Senate – probably results in a larger fiscal package of ~$2.2T, while also de-risking higher tax/regulations.  SPX upside to ~3650 and; 4) Trump/GOP Senate – the status quo outcome is probably the most positive for equities with a larger expected fiscal package than what you might see under a Biden/GOP Senate outcome with potential improvements to the existing tax policies.  SPX upside to ~3,900.