Goldman says the odds of a 'blue wave' in the November elections is rising

Published Thu, Jun 4 20202:32 PM EDTUpdated Thu, Jun 4 20202:57 PM EDT

(This story is only for CNBC Pro subscribers ) Goldman Sachs told clients in a note Thursday that the odds of a "blue wave" of Democrat victories in November are rising and that such an outcome could threaten the 2017 tax cuts that have fueled corporate profits in recent years. Goldman vice president of equity strategy Cole Hunter and chief U.S. strategist David Kostin warned that a sweep of the House, Senate and Oval Office would almost assure at least a partial rollback of President Donald Trump's landmark Tax Cuts and Jobs Act. "The 2020 election is just five months away, and prediction markets now price a 77%, 50%, and 51% likelihood of Democratic victories in the House, Senate, and presidential races, respectively," Cole and Kostin wrote. "Our political economists believe that such an outcome could lead to a full or partial reversal of the 2017 TCJA corporate tax reform legislation." Source: Goldman Sachs, Predictit.org The pair said that a total reversal of the 2017 tax cuts would lift the effective S & P 500 tax rate from 18% back to 26% and reduce the bank's 2021 earnings per share forecast of $170 to $150. They did note, however, that shares of companies that pay higher taxes have outperformed low-tax peers by 6 percentage points since the market's bottom in March, meaning that investors may still have their doubts over whether a tax hike is likely. As one of the Trump administration's biggest victories of the president's first term in office, the 2017 Tax Cuts and Jobs Act lowered the U.S. corporate tax rate to 21%. The legislation effectively allowed businesses to keep more of what they deliver in profits, an outcome that proponents say will continue to drive job growth and investment. But Goldman's updated 2020 election forecast, which suggests Democrats will control both the White House and the House after the 2020 elections, comes amid a surge of support for apparent Democratic nominee and former Vice President Joe Biden. Trump's main challenger has seen a massive uptick in new campaign contributions and donor commitments since George Floyd's death in Minneapolis sparked nationwide protests last week. Fundraisers for the Biden campaign told CNBC that they've helped raise between $200,000 and more than $1 million over the past week through Tuesday. Biden is ahead of Trump in most national polls; a RealClearPolitics polling average showed him with a nearly 8-point lead over Trump as of Thursday afternoon. Trump's polling has also dipped thanks to criticism over the administration's handling of the Covid-19 outbreak and resulting recession. State-imposed business closures and stay-at-home orders have led to both a contraction in official GDP growth numbers and a wave of layoffs across the country. Economists polled by Dow Jones expect the U.S. unemployment rate to hit 19.5% when the Labor Department issues its update to the employment situation Friday morning. If the unemployment rate rises to that level, it would about double the highest previous level since the Great Depression. — CNBC's Michael Bloom and Brian Schwartz contributed reporting. Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

Democratic U.S. presidential candidate and former Vice President Joe Biden addresses supporters at his Super Tuesday night rally in Los Angeles, California, U.S., March 3, 2020.

Elizabeth Frantz | Reuters

(This story is only for CNBC Pro subscribers)

Goldman Sachs told clients in a note Thursday that the odds of a "blue wave" of Democrat victories in November are rising and that such an outcome could threaten the 2017 tax cuts that have fueled corporate profits in recent years.

Goldman vice president of equity strategy Cole Hunter and chief U.S. strategist David Kostin warned that a sweep of the House, Senate and Oval Office would almost assure at least a partial rollback of President Donald Trump's landmark Tax Cuts and Jobs Act.