Backed by a Democrat-controlled congress, President-elect Joe Biden is expected to prioritize a broad-based stimulus package once he takes office on January 20, a development that should help spur better-than-expected GDP growth and booming stock-market returns this year, Goldman Sachs analysts say, but that growth could moderate once Democrats’ likely tax increases go into effect next year.
Headlining the investment bank’s expectations is another round of fiscal stimulus totaling roughly $750 billion, including $300 billion in stimulus checks, $250 billion in relief for state and local governments and $150 billion in extended unemployment benefits.
The additional relief should help lift gross domestic product growth for the year to about 6.4%, more than the estimated 3.6% contraction last year and up from previous expectations of 5.9% growth, Goldman analysts said in a note to clients Sunday.
The faster-than-anticipated GDP growth will help the unemployment rate, which remained flat last month at 6.7%, reach 4.8% by the end of the year–better than previously expected but still higher than pre-pandemic levels of less than 4%.
The firm also expects firms in the S&P 500 will grow their earnings by a better-than-expected 31%, but a likely corporate tax hike under Democrats would go into effect in 2022, leading to lower-than-expected yearly earnings growth of 10%.
“More fiscal spending, faster economic growth and reduced economic slack will in turn drive higher inflation and interest rates,” the analysts said Sunday, forecasting a 1.8% increase in the average price of goods and services this year.
All told, Goldman expects the S&P will rise to about 4,300 points by the end of the year, giving the index 13% upside from current levels after climbing 16% in 2020.
“Like everything else in 2020, the election dynamic was not normal: Control of the U.S. Senate–and the difference between a unified or divided federal government–ultimately depended on the result of the unusual double run-off election in Georgia,” a group of Goldman analysts led by David Kostin said Sunday. “In this instance, politics was decidedly not local, and the state elections had national consequences of immense importance in terms of the legislative agenda that Biden will be able to enact in his first two years in office.”
Biden ran on a platform that included raising the corporate tax rate from 21% to 28%, but that hike may be too bold for even some members of his own party. Goldman notes that Sen. Joe Manchin (D-W.V.), the “most fiscally conservative Democratic Senator,” will likely influence more moderate policy changes given Democrats’ razor-thin majority in the Senate (including a tie-breaking vote from Vice President-elect Kamala Harris). The firm now estimates any tax hikes this year may only drive about $750 billion in government revenue over 10 years, down from $3 trillion under a 28% corporate tax rate.
What To Watch For
The incoming administration is set to release details of a massive new stimulus package on Thursday.