Now that all eyes are on the presidential debate, one might wonder what is in store for Wall Street in 2021. Notably, after months of campaign, President Donald Trump and Democratic nominee Joe Biden will face each other on debate stage on Sep 30 in Cleveland. This will be the first of the three debates between the two candidates before the election on Nov 3.

Chances of Democrats taking over the House and Senate in November are rising. Biden maintains a consistentlead over Trump in national polling at 10-percentage point margin, per data from the Washington Post and ABC News, as quoted on Vox.com. Let’s see how Wall Street might react.

Biden Likes Tax Hike, Trump Doesn’t

Unlike Trump who enacted tax cuts, Biden wants a tax hike. Notably, Trump’s tax law lowered the corporate tax rate from 35% to 21%, starting 2018. Analysis by the Tax Foundation reveals that Biden’s plan is to hike the corporate tax rate to 28%.

Biden is also proposing to levy a minimum tax rate of 15%, a potentially damaging outcome for some major companies that pay little in taxes. Biden's tax plan points at revenues needed to pay down the huge debt incurred to fight the recession (read: All About Biden's Tax Plan & Its Impact on the ETF World).

Biden has proposed raising the top tax rate for capital gains for the highest earners to 39.6% from 23.8%, the largest real increase in capital gains rates in history. That rate would apply only to households with income exceeding $1 million, which make up the majority of capital-gain income. Meanwhile, a tax hike apparently is a negative for Wall Street.

What Lies Ahead for Wall Street?

The above tax plan means a somber Wall Street. Firstly, Biden’s plan to increase the capital-gains tax could result in a large-scale stock sell-off, according to economic analyses, as quoted on CNBC. In 1986, as part of the Reagan tax plan, the top rate for capital gains surged from 20% in 1986 to 28% in 1987. Just before the hike, capital gains’ realizations shot up 60%, the CNBC article noted.

Moreover, Goldman Sachs cautioned that Biden's tax plan coupled with an expected drag on GDP would lower next year's S&P 500 per-share earnings by $20 to $150, per a CNN article. Michael Wilson, chief U.S. equity strategist at Morgan Stanley, has said “extrapolating current multiples on that kind of earnings decline makes 100-150 points on the S&P 500 a baseline for the impact of a tax cut rollback, all else equal,” as quoted on Fox Business. 

Wall Street to Soar in 2021 Irrespective of Who Wins?

While the above-said theory looks appalling for the stock market, in theory, Wall Street may soar in a Democrat win too. Democratic election sweep win would generate 7 million more jobs than a GOP one, analysis finds, as quoted on Yahoo Finance.If both the Senate and the House of Representatives are controlled by Democrats, 18.6 million jobs would be added by 2024, according to the analysis from Moody’s Analytics, quoted on Yahoo Finance.

And if Trump wins and Republicans control both chambers of Congress, 11.2 million jobs would be created. The unemployment rate would improve much faster under Democratic control, slipping to 5.2% in 2022 compared with just 7.1% in a Republican-sweep scenario, per the analysis.

It means better job growth and economic progress in America, no matter who wins. We all know about the super stock market rally in the Trump-era. Even in corona-inflicted 2020, the S&P 500 has risen 3.24% this year and has gained 31% in the past six months (read: A Biden Presidency in the Making? ETF Strategies to Follow).

Notably, Biden’s push for tax incentives will encourage domestic manufacturing. Biden proposed a $1.3-trillion infrastructure overhaul last year. The Democratic presidential candidate’s campaign aims to invest in restoring highways, roads and bridges, changing water pipes, building out rural broadband access and updating schools and etc.So, an uptick in GDP growth is quite expected.

ETFs to Play

SPDR S&P 500 ETF Trust (SPY Quick QuoteSPY - Free Report) , iShares Core S&P Total U.S. Stock Market ETF (ITOT Quick QuoteITOT - Free Report) , iShares Russell 2000 ETF (IWM Quick QuoteIWM - Free Report) , Consumer Discretionary Select Sector SPDR Fund (XLY Quick QuoteXLY - Free Report) , United States Oil Fund, LP (USO Quick QuoteUSO - Free Report) and iShares U.S. Home Construction ETF (ITB Quick QuoteITB - Free Report) are some of the funds that should benefit from greater job creation, better wealth accumulation in consumers’ hands, higher demand, economic growth and low rates.

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