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Politics, not trade, will drive markets in 2020: Goldman Sachs

The stock market spiked and swooned last year in tandem with sentiment surrounding the U.S.-China trade war. But this year, markets will be steered by a different force, according to Goldman Sachs.

“Looking ahead to 2020, politics will be the key focus for investors,” David Kostin, Goldman Sachs chief U.S. equity strategist, wrote in a note Friday.

Kostin said he expects the S&P 500 (^GSPC) will hover nearly flat around 3,250 until November, as investors await the outcome of the 2020 U.S. elections. The blue-chip index’s ultimate landing point this year will largely depend on these election results, especially due to their implications for future fiscal policy, Kostin added.

Ten months ahead of the presidential elections, closely watched prediction market trackers including PredictIt.org have suggested the results will produce a divided government, with Democrats maintaining control of the House but failing to regain control of the Senate. Prediction markets have so far shown a nearly evenly divided split in probability over which party will win the presidency.

Prediction market probability that Democrats have control following the 2020 election, via Goldman Sachs

“A divided government would limit the prospect that legislation is passed reversing the 2017 corporate tax cut,” Kostin said. “We expect the election will resolve policy uncertainty and lift S&P 500 by 5% to 3,400 by year end.”

“However, under a higher corporate tax rate regime, 2021 estimated EPS would equal $162 (vs. our baseline estimate of $183), the P/E (price-to-earnings ratio) would compress to 16x and S&P 500 would end at 2,600,” he added. The S&P 500’s forward P/E had expanded to 19x in 2019.

A shift in focus to politics would mark a major change in impetus from last year, when “evolving U.S.-China trade tensions explained the path of the index last year” along with Federal Reserve interest rate cuts and resilient domestic economic data. The eventual announcement that terms of a “phase one” trade deal between the U.S. and China were reached in December sparked a month-long risk rally and tipped the S&P 500 to 3,230.78 by year-end, representing a near 29% annual rise.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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