America picked its next president, but the most important race for stocks isn’t over. I’m talking about the fight for total control of the Congress.
For all the expectations, it looks as if Democrats won’t win back the Senate—which raises the odds of so-called political gridlock. And that’s especially good news for America’s tech giants: Apple AAPL , Amazon AMZN , Google GOOG , and Facebook FB .
As I’ll show, political gridlock would put off an existential threat to Big Tech that’s kept a heavy lid on their stock prices. But first, let’s talk about where the election stands as I write this.
Blue wave that wasn’t
Democrats are projected to retain control of the House, but the Senate still hangs in the air. Its fate will come down to two runoffs in Georgia on January 5. The odds, however, lie in favor of Republicans.
And that puts a spoke in Democrats’ wheels.
You see, to introduce legislation, both the House and Senate must pass the bill by majority vote. Then the president has to sign it. So if the White House and at least one of the branches of Congress are run by different parties, there’s a strong chance of gridlock.
In short, it’s a stalemate that prevents the government from passing laws because opposing parties delay, veto, and otherwise sabotage each other’s bills.
The most recent example of such gridlock was Congress’s inability to pass the second stimulus package. For months, while Covid swept the nation, a Republican senate and a Democratic house couldn’t successfully duke out the terms for a stimulus bill.
MORE FOR YOU
In other words, if Republicans hold the Senate majority, neither party will likely pass sweeping legislation. Which means…
Trump’s tax cuts will likely stay in place
In 2017, Trump passed the biggest corporate tax overhaul since 1986. His tax bill slashed the corporate income tax rate from 35% to 21%. Trump also let multinational companies pay a local tax rate (often lower or 0% in tax havens) on profits earned in other countries.
With a big chunk of their money coming from overseas, Big Tech got a big boost from Trump’s tax cuts. All of the tech giants saw their tax expenses drop significantly.
Problem is: Biden is now set to put an end to this corporate indulgence. His tax plan calls for an increase in the corporate tax rate from 21% to 28%. He also wants to impose a minimum tax on all foreign earnings of U.S. companies located overseas.
Investors fear that Biden’s tax plan will weigh down stocks. But Biden is not likely to reverse Trump’s cuts under a split Congress.
It’s “hard to imagine” that Republican Senate Majority Leader Mitch McConnell will reverse the Trump administration’s tax cuts, Ralph Schlosstein, Co-CEO of Evercore EVR , told Business Insider last Wednesday.
The risk of a Big Tech break-up fades away
Big Tech has been in antitrust crosshairs for a while now. And with a growing number of lawsuits targeting tech giants over “business killing” practices, antitrust enforcement risks are growing by the day.
But as long as the Senate stays red, antitrust laws aren’t likely to change. A telltale sign of looming political stalemate here is Congress’s recent failure to move forward with a landmark antitrust report.
This past October, the Democratic-led House put together a report on Big Tech monopolies followed by a 15-month investigation. The report called for breaking up or otherwise restricting Facebook, Google, Amazon, and Apple.
Although a break up of Big Tech is one the few things that unites both parties, the report didn’t catch on. According to the New York Times NYT , Republicans largely pushed back against the Democrats’ proposed legislation.
As such, Wall Street is taking a divided Congress as a big win for Big Tech. ”We now see a material reduction in the possibility of a meaningful overhaul to existing antitrust law,” Evercore analysts wrote in a note to clients on Wednesday. Big Tech stocks could “major winners on this front,” they said.
For those reasons, keep a close eye on Georgia’s runoffs on January 5. If things go as expected, Big Tech may enjoy a strong run up in 2021.
Stay ahead with “big picture” market insights you won’t find elsewhere
Every week, I put out a story that explains what’s driving the markets. Subscribe here to get my analysis and stock picks in your inbox.