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.