Market is expecting fiscal stimulus next year

Published Wed, Sep 14 20163:36 PM EDT

The stock market is expecting a President Clinton or Trump to usher a big fiscal stimulus through Congress as investors are bidding up equities, which stand to benefit the most from increased government spending and lower taxes. Bank of America Merrill Lynch crunched the data, separating out the stocks leveraged to big government versus those that are not. But the firm is not recommending clients buy these stocks further, instead telling them to prepare for eventual disappointment when these stimulus plans ultimately fall short of the big expectations. "Both presidential candidates have outlined fiscal policies which should promote growth," Bank of America Merrill Lynch's Savita Subramanian said in the note to clients this week. "But the benefits from stimulus have meaningfully worked their way into these stocks already." With the number of media mentions of "fiscal stimulus" up to 2009 levels, Subramanian is wary of theme saturation and is "cautious on the market in the near-term" as result of high valuations. Tobacco, leisure products, diversified financials, building products and utilities stocks have more than 20 percent downside if they revert to historical valuation multiples, according to the strategist. Source: Bank of America Merrill Lynch Multiples for stocks exposed to the fiscal stimulus theme expanded 12 percent since February, which is 50 percent more than the rest of the market, according to the firm. Instead Subramanian has overweight ratings on the health care and technology sectors as their forward P/E valuations are cheap versus history. In a separate report this week, Strategas' Daniel Clifton downplayed the impact of fiscal stimulus spending on the economy. He noted how Hillary Clinton's infrastructure spending plan represents just 0.3 percent of U.S. GDP. "Infrastructure spending should definitely be part of any economic package and is likely needed for a political compromise. But infrastructure spending works with such a lag that any money approved in 2017 will not start coming out until 2018," Clifton wrote in a note Tuesday. "Infrastructure spending alone cannot boost GDP enough to allow monetary policy to normalize."

A contractor guides a steel beam into place while working on the Korean Air Wilshire Grand hotel and office building in downtown Los Angeles.

Patrick T. Fallon | Bloomberg | Getty Images

Bank of America Merrill Lynch crunched the data, separating out the stocks leveraged to big government versus those that are not. But the firm is not recommending clients buy these stocks further, instead telling them to prepare for eventual disappointment when these stimulus plans ultimately fall short of the big expectations.

"Both presidential candidates have outlined fiscal policies which should promote growth," Bank of America Merrill Lynch's Savita Subramanian said in the note to clients this week. "But the benefits from stimulus have meaningfully worked their way into these stocks already."

With the number of media mentions of "fiscal stimulus" up to 2009 levels, Subramanian is wary of theme saturation and is "cautious on the market in the near-term" as result of high valuations. Tobacco, leisure products, diversified financials, building products and utilities stocks have more than 20 percent downside if they revert to historical valuation multiples, according to the strategist.