Investing.com -- While next week’s U.S. election may dominate headlines, Bank of America analysts argued in a note Monday that corporate profits, not politics, hold the real influence over the stock market.
The bank’s research emphasizes that the election results will likely have a more symbolic effect on investor sentiment than a substantial impact on market fundamentals.
The team notes, “Profits matter more for stocks than politics,” suggesting that the election will primarily serve to clear an uncertainty “overhang” on the market more than anything.
BofA’s analysis also indicates that post-election momentum tends to persist in the market, with the direction of returns over the two weeks following an election matching the initial one-day reaction 100% of the time in the past seven election cycles.
However, the analysts recommend fading any significant moves, cautioning that “a big knee-jerk reaction (2%+) should be faded,” given that such large moves occurred only 25% of the time on election days since 1928.
If a Republican sweep occurs, optimism around deregulation and tax cuts could create an initial rally, says BofA, though they warn of potentially higher yields and tariffs that could impact longer-term growth.
In the event of a split Congress with a Democratic win at the executive level, the bank explains that the focus would likely shift to higher tariffs, while deregulation could provide modest support for markets.
Alternatively, they believe a Democratic sweep could bring increased corporate tax rates, which BofA estimates could cut earnings per share (EPS) by around 5%.
Still, they suggest buying the dip if the reaction leads to a significant sell-off, given the potential for fiscal stimulus.
Ultimately, BofA believes that while politics may influence market direction in the short term, strong corporate profits will continue to provide the main support for equities.