Technology stock futures dropped sharply and investors bet on a boost for value shares after a Democrat win in a key Senate race raised prospects of a bigger fiscal stimulus that could feed through to economic growth and higher inflation.
Contracts that wager on the future direction of the benchmark S&P 500 index fell 0.3 per cent, while those on the top 100 stocks in the technology-focused Nasdaq dropped 2 per cent.
Futures on the Russell 2000 index of smaller companies, which has a high weighting of stocks in economically sensitive industries including finance, real estate and manufacturing, gained 1.8 per cent. London’s FTSE 100, where companies in energy, banking, materials and industrials comprise about half the index by weighting, rose 1.9 per cent.
“The market consensus is that Democrat control of both houses means stimulus and infrastructure spending, so in the near term that means more economic growth,” said Ben Laidler of Tower Hudson Research. “The stocks that are most driven by this are companies in cyclical industries and small-caps, where earnings have been more depressed.”
In a crucial Senate race in Georgia, the Associated Press declared a win for Democratic challenger Raphael Warnock, while his fellow Democrat Jon Ossoff clung to a narrow lead. A Democrat victory in both run-offs would result in a 50-50 split of the upper house with vice-president elect Kamala Harris able to break the tie in significant votes such as Budget resolutions.
Goldman Sachs analysts forecast a Georgia win would enable the Democrats to add $600bn of stimulus spending to the $900bn already agreed by lawmakers late last year.
The yield on 10-year US Treasury bonds added 0.05 percentage points to 1 per cent, its highest since March, as investors sold the securities, which are sensitive to inflation expectations.
The Nasdaq 100 gained almost 48 per cent in 2020, as the pandemic boosted tech businesses and low bond yields prompted investors to put higher valuations on growth companies’ future earnings.
Tech investors have also been wary of a so-called blue sweep because president-elect Joe Biden has campaigned for tougher antitrust rules and taxation for the sector.
“The market is taking a view that we will see more stimulus and this will have to be paid for,” said Stefan Keller, asset allocation specialist at investment house Candriam. “The fear is of higher taxes on the most successful companies of 2020, which are the tech giants.”
In Europe, the benchmark Stoxx equity index rose 0.9 per cent, pushed up by shares in the energy and financial services sectors, which investors consider value stocks because of their higher dividend yields and tendency to outperform when economic growth prospects improve.
Energy shares were also boosted by a rise in the oil price, with Brent crude adding 1.3 per cent to $54.28 a barrel, its highest since February 2020.
At publication time, the race between Democrat Jon Ossoff and incumbent Republican David Perdue remained still too close to call, with US media reporting about 97 per cent of the vote counted.
But most of the remaining ballots to be tallied were in heavily populated, Democratic-leaning counties around the city of Atlanta. The New York Times forecast a more than 95 per cent chance of victory for Mr Ossoff.
“Democrats controlling both houses would mean that they could pass through larger fiscal packages, but with filibuster rules, co-operation is still necessary,” said Sebastien Galy, senior macro strategist at Nordea Asset Management. “Such [a] boost to the economy is . . . the logical move to avoid an economy being stuck in a low-growth environment quite quickly.”