Could A Split Government Be Good News For Software Investors?

Despite ongoing uncertainty surrounding the U.S. Presidential Election, a potentially split government could be a software stocks dream.

Nov. 5, 2020

Short of a full-blown economic crash, there are few things that can rattle the market like a good old presidential election. Over the past few days, we’ve seen pretty dramatic swings across both U.S. and global indices as the world tries to guess if the Democrats or the Republicans will occupy 1600 Pennsylvania Ave for the next four years.

One of the problems with this is that people tend to vastly overestimate the influence a sitting president has on the stock market. There is, however, a wider political battle ongoing that has given software companies like Twilio, Okta, and Docusign a strong boost yesterday, closing the day up 9.2%, 9.75%, and 12.75% respectively.

A Split Government

As the battle rages on for the presidency, it’s easy to forget that votes are also being cast for the Senate and the House of Representatives too. As it stands, it looks as though Joe Biden might edge out the presidential race and that the Democrats will hold onto their majority in the House, while Republicans will maintain their hold of the Senate.

To the casual observer, the splitting of the major legislative houses across two parties that appear diametrically opposed to one another at the minute might seem like a bit of a disaster. However, for Wall Street, gridlock is good.

Maintaining The Status Quo

There had been a lot of posturing coming into this election, including Facebook’s Mark Zuckerberg and Twitter’s Jack Dorsey being (digitally) hauled in front of a Senate Judiciary Hearing last week for senators to shout at them for a few hours. The timing of this session wasn’t a mistake, it was an opportunity for both parties to set out their stalls in front of the electorate and show the attitudes they will take towards regulating these big social media platforms. 

Other talking points surrounding this election have included healthcare and tax reforms. If Joe Biden is to take the presidency, for example, it is widely expected that he would try to bring in significant changes to healthcare — including a new “public option” for healthcare insurance — as well as plans for tax hikes on corporations and wealthy individuals. 

With a split government now looking like a real possibility though, the influence that both sides of the aisle will have on legislating will be muted. In particular, Republicans in the Senate will be expected to push back against progressive tax policies from their Democrat counterparts which will result in… well, not an awful lot of change happening at all really.

For investors, this is considered good news. If there’s one thing the market doesn’t like, it’s uncertainty, and the possibility of a host of new tax reforms would have forced many companies to readjust their profit outlooks for the near-future.

Anthony Scaramucci, the found of Skybridge Capital )and a former communications director to the incumbent President Trump), said yesterday of the emerging results:

“That sort of mixture of government will slow things down from a tax policy point of view … I suspect that they will pass a pretty big stimulus and infrastructure bill, which will hopefully boost the economy both here in the United States and around the world.”

So Why Did Software Stocks Jump?

With software companies, in particular, a return to higher corporate tax rates like those seen in 2016 could have put pressure on earnings by as much as 10%, according to a note by Evercore ISI analyst Kirk Materne yesterday morning, especially for those that make a lot of their revenue in the U.S.

As such, the possibility of a split government buoyed investors and drove prices up yesterday. However, as counting continues across many key states across the U.S. — and with the distinct possibility of a contested election dragging proceeding out longer — it is important to remember that nothing is certain as of yet. 

MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.