Biden v. Trump on Growth: What the Market Thinks

In his October debate with Joe Biden, Donald Trump predicted that the stock market would crash if his rival were elected. Instead, the S&P500 index has, since the election, soared by more than 14 percent. What might this tell us about the market’s expectations for growth prospects under a new president?

As we explained in Business Insider earlier this month, statistical analysis of stock-price movements can allow us to extract the market’s expectations for corporate-earnings growth. We showed that the Implied Earnings Growth (IEG) from Biden’s victory amounted to a substantial 0.77 percentage points—virtually identical to that following Trump’s victory over Hillary Clinton in 2016. (We assumed the market had baked in a 65 percent chance of a Biden win, equivalent to the betting lines.) Based on survey data, the main factors appeared to be expectations that, under a Biden presidency, the United States would take a more robust approach to the pandemic, provide greater fiscal stimulus, and return to a more traditional trade and foreign policy.

In addition to telling us where earnings might be headed, stock price movements can suggest changes in the trajectory of overall economic growth. According to data from the Bureau of Economic Analysis, U.S. corporate earnings from 1990 to 2019 rose with GDP at a ratio of nearly 4:3. As the left-hand figure above shows, this relationship suggests that growth in 2021 will be a substantial 0.6 percentage points higher than it would have been had Donald Trump been re-elected.

As the black bar in the right-hand figure shows, October growth forecasts from the IMF had put the United States toward the bottom of the pack in the G20, at 3.1 percent. If we assume that the IMF, like the markets, had baked in a 65 percent chance of a Biden win, we take Biden’s win to herald a growth rate 20 basis points higher—that is, 3.3 percent, as shown by the blue bar. This assumption also implies that if Trump had won the election the expected U.S. growth rate would have plunged 40 basis points to 2.7 percent, as shown by the red bar—behind all G20 nations save Japan.

In short, whereas the stock market had been Trump’s favorite indicator of his political virility, that market is expecting far better corporate earnings—and economic growth—under President Biden.