Post-election stock rally is an endorsement of a split US government, Evercore co-CEO says

• The stock market's post-election rally is an "endorsement of divided government" despite stifled odds of a front-loaded stimulus deal, Ralph Schlosstein, co-CEO of Evercore, said Wednesday.
• While neither presidential candidate has reached the threshold for victory just yet, congressional race outcomes signal Republicans will keep control of the Senate.
• A split government stymies hopes for a massive fiscal relief bill, but it also cuts into Democrats' ability to reverse the Trump administration's tax cuts and deregulation, Schlosstein said on Bloomberg TV.
• Whoever wins the presidency will need to contend with a surging debt pile and may need to raise taxes to deal with the record deficit, he added.
• Visit the Business Insider homepage for more stories.

The stock market's hugely positive reaction to preliminary US election results suggests investors are largely supportive of a divided government, Ralph Schlosstein, co-CEO of Evercore, said Wednesday.

While critical battleground states continue to tally votes for the tight presidential election, the makeup of the 117th Congress has mostly emerged. The lack of a so-called "blue wave" will likely leave the Senate in Republicans' control while expanding their minority in the House.

Though many elections haven't yet been decided, stocks surged in Wednesday trading as investors turned bullish on the prospect of a split government. The upswing "is an endorsement of divided government" from the market, Schlosstein said on Bloomberg TV. While a Republican Senate curbs the chances of a massive stimulus bill, it also staves off Democrats' efforts to raise corporate taxes and pursue new industry regulations, he added.

Read more: Morgan Stanley breaks down why defense stocks are cheap must-buys after the election regardless of who wins — including the top pick it expects to rally 62%

Beyond making it harder for a Biden administration to pass progressive policies, a divided government would likely protect some of the market-friendly policies enacted by the Trump administration. It's "hard to imagine" that Senate Majority Leader Mitch McConnell, who is set to maintain his position come January 2021, will prioritize reversing the Trump tax cuts, Schlosstein said.

Deregulation that took place throughout Trump's term, he added, will also be ardently defended by a Republican-controlled Senate.

Regardless of who wins the presidency, both parties will leave election season having to do "a lot of soul-searching," Schlosstein said. A Biden win might force Republicans to reconcile Trump's penchant for fiscal spending, and Democrats will need to determine how they can reinforce their ranks in Congress.

Both parties will also need to address the ballooning government deficit and pattern of increased spending and slashed taxes, the Evercore executive added. While legislators shouldn't yet skimp on providing fiscal support to the virus-slammed economy, taxes may need to rise in the near future to keep the debt pile from swelling further.

"We're living in a world, and we have been for many years, where our appetite for government spending significantly exceeds our willingness to pay for it," Schlosstein said. "That's not a sustainable situation."

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