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Illustration: Aïda Amer/Axios

As the coronavirus pandemic continues to worsen and President Trump's approval rating sinks, Wall Street analysts are discussing the increasing probability of a "blue wave" Democratic sweep of the House, Senate and presidency.

Why it matters: With a blue wave, Biden could realistically enact major policy shifts such as higher taxes, climate change reform and increased health care spending.

The state of play: Investors have been pricing in a Biden win for weeks, and now analysts at firms like Goldman Sachs, Société Générale, State Street, TD Securities, UBS and others are preparing for a like-minded Congress in his corner.

  • A lot of investors are designing what Ed Yardeni, president and chief investment strategist at Yardeni Research, calls a "Biden Blue portfolio."
  • "Winners in a blue wave likely would be domestic energy-efficient technologies (e.g., wind and solar), railroads, home builders, building contractors, and engineers, manufacturers and material suppliers, broadband network providers, utilities, autos, medical suppliers, and innovative technologies (e.g., artificial intelligence)," Yardeni writes in a recent note to clients.

Yes, but: "A blue wave should be a significant negative for risk assets due to a progressive policy agenda," analysts at TD Securities say in a note.

  • In addition to raising taxes, influential liberal Democrats like Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen. Elizabeth Warren (D-Mass.) have advocated for wealth redistribution, wealth taxes and breaking up Big Tech companies.

Reality check: "This could be a challenging scenario for the markets over the next 6 months, but markets will eventually react positively to the increase in government spending," counters Lee Ferridge, head of global macro strategy at State Street.

  • That spending could include Biden's proposal for a $700 billion investment in research and development for new technologies and a newly unveiled $775 billion plan to invest in child and senior care, provide family leave, and create 3 million new caregiving or education jobs.

What to watch: A blue wave is not a certainty, says Ryan Detrick, senior market strategist at LPL Financial.

  • "Since 1928, the stock market has accurately predicted the winner of the presidential election 87% of the time, including every single election since 1984. When the S&P 500 has been higher the three months before the election, the incumbent party usually has won; when stocks were lower, the incumbent party usually has lost."
  • "Some good news on the economy in the coming months or progress toward a vaccine could potentially get the S&P 500 back to positive territory for the year ... and it’s possible that may help President Donald Trump’s re-election chances."

Go deeper

Poll: Hispanic vote key as Trump leads Biden in close Texas race

Biden in Houston in March. Photo: Callaghan O'Hare/Getty Images

President Trump leads Joe Biden 47% to 43% in Texas with just over a week until Election Day, according to the latest New York Times/Siena College poll.

Why it matters: Demographic changes and a wave of enthusiasm have some convinced that Texas could back a Democrat for president for the first time since 1976. But Biden's lagging support among Hispanic voters in the NYT/Siena poll could prove fatal to his chances of winning the state's 38 electoral votes.

Dion Rabouin, author of Markets
Oct 26, 2020 - Economy & Business

Bond investors see brighter days

Illustration: Sarah Grillo/Axios

U.S. government bonds could breakout further after yields on the benchmark 10-year Treasury note ticked up to their highest since early June last week.

But, but, but: Strategists say this move is about an improving outlook for economic growth rather than just inflation.

26 mins ago - Podcasts

Podcast: After the Biden inaugural

Joe Biden was sworn in today as America's 46th president in an inauguration unlike any other in modern history.

Axios Re:Cap goes deeper into the speech, the atmosphere and what it all tells us about the incoming administration, with Axios political reporters Hans Nichols and Alexi McCammond.