October 30, 2020
Image: NAS, Noun Project and Protocol
Hello! This week: How tech stocks might handle the election, what we've learned from earnings, and Ant's humongous IPO. Want Index in your inbox each week? Subscribe here.
Next week's election is one of the most unpredictable in recent memory — and depending on the eventual outcome, markets could have dramatically different reactions. No one knows for sure how markets would react to each eventuality, but there are some good guesses flying around. Here's what could happen to tech stocks under each possible scenario.
"A blue wave would likely prompt us to upgrade our forecasts," Goldman Sachs analysts wrote earlier this month, noting in a separate report that it would have a "modestly positive net impact on the trajectory of S&P 500 profits." Democratic control of the House, Senate and White House — seen by many as the most likely outcome — would make a stimulus package in January much more likely, giving the economy a much needed boost.
A Republican sweep would also probably be good for stocks, given the possibility of further tax cuts. But markets might get jittery on a lack of stimulus and the general uncertainty of another four years of Trump.
No one wants a divided congress under Biden, though. Under a Biden presidency, "control of the Senate would mean the difference between substantial fiscal expansion and fiscal gridlock," Morgan Stanley analysts said. JP Morgan analysts, meanwhile, characterized the situation as "stagnation," with no further stimulus expected. Bear in mind, though, that tech will be less affected by that than other sectors — though, as we saw in earnings this week, tech stocks are unlikely to come out unscathed (more on that in a minute.)
The worst outcome, though, may be no result. "Investors may have initially feared a Blue Wave, but a delayed or contested election outcome is even more unsettling," say UBS analysts. There's precedent for that: As The New York Times notes, stocks fell more than 8% after the contested 2000 election. This time round, with the possibility of civil unrest, things could be even worse.
So the best thing to prepare for might be volatility. That seems inevitable either way, because the election isn't the only thing roiling markets at the moment. As we saw with new lockdowns in Europe this week, COVID has absolutely not gone away.
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Too many companies reported this week to go into each individually (check out Source Code for a look at the big four), but here are some of the big trends.
But the good results weren't enough for investors. That may be because they were much more focused on the cautious outlook for the current quarter. SAP, reporting earlier this week, was a particularly grim example of that: Its shares plunged more than 20% on its forecast cuts. But while Big Tech's forecasts were less dramatically bad, they weren't cheery. As I mentioned above, tech isn't immune from the wider economy and worsening COVID cases: If things don't get back on track, people and companies may stop spending, and no one wins.