Why the Biggest Winner in Tuesday's Election May Be Stocks

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.

Because the S&P 500 closed Tuesday at slightly more than 2012 this model predicts a return of 18% in the low-inflation scenario and 12% if inflation ticks up a bit. Even the 12% may be a little low, Stovall says. Higher inflation would mean faster economic growth than forecast, raising earnings estimates. 

All of this may be enough to make the most rock-ribbed GOP investor borrow a line from President Obama: This is our moment, this is our time. Corporate profits and low inflation matter more than issues such as Ebola and ISIS that dominated so much of the political landscape this fall, and politicians don't need to do anything next year to make them happen.

At the time of publication, the author held no positions in stocks mentioned.

Follow @timmullaney

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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