NEW YORK (TheStreet) -- Whatever your political beliefs, Tuesday's election gains by Republicans are signaling a big year for stocks.
A report by Standard & Poor's Capital IQ strategist Sam Stovall has gotten a lot of attention this week for pointing out that stocks have done better since World War II with a Republican Congress and a Democratic President. And after Tuesday night's returns, we have the most GOP Congress since the 1920s. But Stovall has done another study that makes an even stronger case for stocks: In the year after the last 17 midterm elections, the market has jumped an average of more than 17%.
Stovall admits he doesn't know why divided government helps stocks. But his call about the coming post-midterm gain gives solid reasons to be optimistic. Investors who move into the market now can capitalize on both a consistent history and solid fundamentals, because corporate earnings are rising and inflation is staying very low.
"Both fundamentals and history suggest it could be 15% or higher," Stovall says. "There's no guarantee for any of this stuff. But for an investor who has too little in the stock market, this is a good time.''
Here is the formula. First, Stovall takes S&P Capital IQ's estimate that corporate profits of the S&P 500 will rise to $129.34 next year. (This number is calculated by weighting the profits of each company in the index to reflect its market capitalization relative to other S&P 500 members, with giants such as Apple (AAPL) , Exxon Mobil (XOM) and Berkshire Hathaway (BRK.B) counting the most). Then he applies Peter Lynch's Rule of 20: The notion that the market's proper price-to-earnings ratio is 20 minus the inflation rate.
Plugging in the numbers, you get a forecast that the S&P 500 should reach 2,380 in a year if inflation is 1.6%, and to 2,250 if inflation is as high as 2.6%. Using the Federal Reserve's preferred inflation measure, which has increased 1.48% for the last 12 months, points toward the high end of that range.