JPMorgan says the consensus is wrong and a Biden victory may be positive for the stock market

Published Mon, Jul 6 202010:25 AM EDT

(This story is only for CNBC Pro subscribers ) Though the Wall Street consensus might view Joe Biden's potential victory as a negative for stocks, JPMorgan said Monday it thinks the Democrat's election could turn out to be a slight positive. The bank's newfound optimism is based on its belief that the coronavirus will force Biden to moderate his policies that could create headwinds for American business. That likely means that any plans to reverse the Trump-era corporate tax cuts may ultimately be softer than currently discussed and leave markets with a more diplomatic White House, according to JPMorgan's chief U.S. equity strategist. "Other policy proposals including infrastructure spending, softening tariff rhetoric and higher wages should be net positive for S & P 500 earnings and largely offset the corporate tax headwind," wrote Dubravko Lakos-Bujas. "Further, a more diplomatic approach to domestic/foreign policy will likely result in lower equity volatility and risk premia." Of top priority for U.S. investors would be Biden's tax policies and to what extent the Democrat could reverse Trump's 2017 Tax Cuts and Jobs Act, which lowered the corporate tax rate to 21% from 35%. Democrats have discussed rolling back part of that cut and raising the rate to 28%, a move Lakos-Bujas says could create an S & P 500 earnings per share headwind around $9. That could add even more stress for U.S. businesses, the strategist wrote, which are currently struggling to reopen amid the Covid-19 outbreak. But for that reason, a Biden administration would likely have to curb its original tax policy aspirations to a level not as onerous as first feared, according to JPMorgan. "While higher corporate taxes are becoming a consensus election risk, it is worth noting tax rate has been drifting lower since 1960s and it would require significant political will to push tax rates significantly higher," Lakos-Bujas wrote. "In other words, headline risk might be greater than actual policy similar to many scares that have come before it." JPMorgan also noted that Biden would inherit the multiyear U.S.-China trade dispute. While the Democrat hasn't said much on how he'd like to change dialogue with Beijing, Biden has emphasized reducing trade barriers and said he'd prefer building international coalitions. That may come as a relief to U.S. investors, who have suffered a barrage of trade angst for much of Trump's presidency as the White House worked to reduce the nation's deficit with China. But tariffs, a tax on foreign goods popular with the current administration, were the largest headwinds for global growth in 2019, according to JPMorgan. They reduced S & P 500 earnings growth potential by 7% to 8%, according to the bank. "While Phase 1 was expected to reverse 25-30% of the trade related EPS headwind this year via second-order effects ($2-3), tariff reduction (~$0.50), and higher China exports (~$0.50), the global recession has likely pushed out some of this benefit," Lakos-Bujas wrote. "Therefore," the strategist added, "if Biden is able to achieve bi-lateral easing of tariffs with increased purchases of goods by China, it could be a significant offset to higher taxes." — CNBC's Michael Bloom contributed reporting.

Democratic U.S. presidential candidate and former Vice President Joe Biden speaks during a Biden campaign event at a recreation center in Lancaster, Pennsylvania, U.S., June 25, 2020.

Mark Makela | Reuters

(This story is only for CNBC Pro subscribers)

Though the Wall Street consensus might view Joe Biden's potential victory as a negative for stocks, JPMorgan said Monday it thinks the Democrat's election could turn out to be a slight positive.

The bank's newfound optimism is based on its belief that the coronavirus will force Biden to moderate his policies that could create headwinds for American business.

That likely means that any plans to reverse the Trump-era corporate tax cuts may ultimately be softer than currently discussed and leave markets with a more diplomatic White House, according to JPMorgan's chief U.S. equity strategist.