Goldman Sachs sees a rising possibility of a 'blue wave' in the November elections, which poses a risk to corporate profitability and dividends

• Goldman Sachs sees an increased possibility of a "blue wave" in the November elections, which could impact corporate profits and dividends.
• That could lead to a partial or full reversal of the Tax Cuts and Jobs Act corporate tax reform legislation.
• "We estimate that a full reversal would lift the effective S&P 500 tax rate from 18% back to 26% and reduce our 2021 EPS forecast of $170 by $20 (11%) to $150," Goldman vice president of equity strategy Cole Hunter and chief US strategist David Kostin wrote in a Thursday note.
• Read more on Business Insider.

Goldman Sachs said the possibility of a "blue wave," or round of Democratic victories, is increasing ahead of the November 2020 elections.

"The 2020 election is just five months away, and prediction markets now price a 77%, 50%, and 51% likelihood of Democratic victories in the House, Senate, and presidential races, respectively," Goldman vice president of equity strategy Cole Hunter and chief US strategist David Kostin wrote in a Thursday note.

According to Goldman, that could lead to a partial or full reversal of the 2017 Tax Cuts and Jobs Act, sweeping corporate tax reform legislation. Rolling the legislation back or dashing it entirely would have a negative impact on the earnings and dividends of companies, Goldman said.

"We estimate that a full reversal would lift the effective S&P 500 tax rate from 18% back to 26% and reduce our 2021 EPS forecast of $170 by $20 (11%) to $150," Hunter and Kostin wrote.

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Still, Goldman noted that high-tax-paying equities have actually outperformed their low-tax peers since March – gaining 44% and 38%, respectively. This could imply that investors may not be pricing in the risk of an increase in taxes, according to the note.

This is just one factor that Goldman sees contributing to the underperformance of long-dated dividends, the note said.

Other contributors include that the equity market has been disproportionately driven by valuation expansion as opposed to earnings growth. Also, the market has become increasingly concentrated in big-tech companies such as Facebook, Apple, Amazon, Google, Netflix, and Microsoft.