President Joe Biden is having a tough time of it. Few would disagree that he is in serious political difficulties at present. But the stock market, always taken as a critical validator and benchmark by his predecessor, is going gangbusters under his leadership. It’s interesting to explain why.

This is how the S&P 500 has moved from the first day of trading in the first year of the last six presidencies. With a gain of more than 20%, the S&P has now done better under Biden than it had at the same stage under any of his predecessors since George H.W. Bush:

There are lots of reasons for a stock market to rise or fall, of course. George W. Bush took over just as a bubble had burst, and then the 9/11 terrorist attacks happened, so it’s hard to say that anything he did was behind the S&P’s 10% fall during his first year. Others were luckier in their timing. 

If there is one single reason why the stock market is doing quite so well under Biden amid the unhappiness and dissension of 2021, it is earnings. It’s no surprise that profits are improving compared to 2020. But it’s turned out in each quarter that brokers and their analysts had underestimated the scale of the rebound. Forecasts for the full year have surged at a remarkable rate. This is how estimated earnings, as calculated by Bloomberg, have risen so far this year, compared to 2017, the first year of Donald Trump:

Neither president has much to do with either of these numbers. And there is no great increase in animal spirits under Biden. Price-earnings ratios, on a prospective or historic basis, have fallen slightly so far this year.

However, there is at least one way in which markets are directly sensitive to the president, and where it’s possible to draw a very direct comparison with Trump. It isn’t a comfortable one for Biden. 

Trump arrived with a mandate to cut corporate taxes, just as Biden arrived with a mandate to reverse those cuts. There is room for all kinds of argument about whether lower corporate taxes are a good idea in the long run. In the short run, there is no question that markets like them. Tax cuts are also most beneficial for those companies that are less able to benefit from loopholes and thus pay a higher effective tax rate.

Handily, Goldman Sachs Group Inc. keeps baskets of the U.S. stocks with the highest and lowest effective tax rates, which it makes available on the Bloomberg terminal. This is how the high-tax basket (of stocks that stand to benefit most from a tax cut) has performed relative to the low-tax basket since Trump was elected on Nov. 8, 2016:

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