Goldman Sachs told clients on Monday that the longest bull market in modern U.S. history will continue in 2020 and mark its 11th anniversary in part thanks to an expected political stalemate in Washington.
In a note subtitled, "United we fall, divided we rise," the firm's chief U.S. equity strategist, David Kostin, outlined his market predictions for 2020, including the implications of the upcoming presidential election.
"We expect the current bull market in US equities will continue in 2020. The durable profit cycle and continued economic expansion will lift the S&P 500 index by 5% to 3250 in early 2020," Kostin wrote. "However, rising political and policy uncertainty will keep the index range-bound for most of 2020."
Goldman Sachs' analysis shows that since 1928, the median S&P 500 12-month return under a divided government is 11% versus 8% under a unified government. That's because a gridlocked government — hamstrung from passing either party's initiatives or reforms — tends to generate better returns than when one political party controls Congress.
The better-than-consensus projection may stem from the suspicion that a split Congress could act to keep President Donald Trump's aggressive trade tactics in check while at the same time prevent progressive Democrats from curtailing the GOP's 2017 tax cuts and deregulation.
"The election outcome could magnify risks or the economic growth outlook could deteriorate," he added. "A unified federal government post-election could prompt investors to assume the tax cut is reversed and lower projected 2021 earnings per share."
Billionaire and former New York Mayor Michael Bloomberg entered the pool of 2020 presidential hopefuls on Sunday, when the 77-year-old formally announced his bid after months of speculation.
Despite what many have categorized as a pricey equity market subject to changing trade headlines, Goldman Sachs has one of the most bullish outlooks for 2020 among the major investment banks tracked by CNBC.
The bank's equity strategist announced earlier this month that his official 2020 S&P 500 target is 3,400, a figure that implies more than 9% upside from Friday's close and 4 percentage points higher than the average target. The mean strategist target for the broad stock market index is 3,272.
The more modest 2020 estimates from Wall Street's top stock strategists come at the end of what's expected to be one of the market's best calendar years in the present economic recovery. The current market boom, which started March 9, 2009, had returned 468% for the S&P 500 through the first day of November making it both the longest and best-performing recovery since World War II.
The largest public companies are up 24% so far this year, led by outperformance in technology, communication services and industrials stocks despite their exposure to U.S.-China trade headwinds. The ongoing fight between the globe's two largest economies has been cited by major American companies as one of the single most significant headwinds this year.
Of 451 S&P 500 companies that had held third-quarter earnings conference calls by Nov. 14, 25% cited the term "tariff" during the call, according to FactSet analysis. Industrials led all sectors with 30 companies citing the term "tariff" on earnings calls.
For his part, Kostin said his optimism stems both from his belief in a "durable profit cycle and continued economic expansion" in early 2020 as well as a slow grind higher in the back half of the year as a partisan standstill allows modest gains.
The riskiest scenario for equities, he wrote, could be a unified Democrat government after the 2020 election. An aligned government could roll back Trump's landmark tax cuts and restore the corporate rate to 35%. Every 1 percentage point change in the effective corporate tax rate would lead to an approximate 1% change in S&P 500 earnings per share, Goldman estimates.
"The election outcome could magnify risks or the economic growth outlook could deteriorate," Kostin wrote. "A unified federal government post-election could prompt investors to assume the tax cut is reversed and lower projected 2021 EPS to $162."