U.S. Stocks Look on Bright Side of Biden’s Tax and Spend Plan
President Joe Biden’s potential tax hikes will likely only deal a temporary blow to equities given that stocks are riding a wave of stimulus optimism, including the prospect of growth-friendly infrastructure spending, strategists say.
Equities are pricing in the good news around infrastructure spending and showing “little concern about tax hikes,” Goldman Sachs Group Inc. strategists led by David Kostin wrote in a note Friday.
The S&P 500 is up about 4% this year, bolstered by exceptionally loose monetary and fiscal policy. Strategists say that Biden’s plans for the country’s first major federal tax hike since 1993 to finance economic programs like infrastructure and fighting climate change will weigh on company earnings and equity allocations in the short term. But a lack of details, as well as potential Congressional obstacles to higher levies, make such evaluations tentative at best.
Higher corporate taxes are likely to cut S&P 500 earnings by 3% in 2022, the Goldman strategists said in examining the “looming macro issue” of the administration’s plans to raise corporate and personal taxes.
The JPMorgan Chase & Co. team led by John Normand said that higher corporate taxes will be a “drag on earnings growth and buybacks.” During his campaign, Biden discussed raising the corporate tax rate to 28% from 21%, still below the pre-Trump 35%, increasing the top marginal tax rate to 39.6% and taxing capital gains and dividends at the higher ordinary income tax rate.
Higher capital gains taxes for top earners could cut equity allocations, lower stock prices and reverse gains from momentum trading, Goldman said, while capital gains taxes “could trigger pre-emptive selling before the tax year ends” according to JPMorgan.
But Normand’s team also pointed to how recent stimulus measures and post-Covid-19 reopening of economies should lead to “extraordinary growth and profits momentum.” In fact, capital gains taxes increases in 1987 and 1993 had only a “modest” intra-month impact with a drawdown of less than 5%, according to JPMorgan.
JPMorgan added that funding the infrastructure plan would imply much less pressure on bond yields than the two recent Covid-19 stimulus packages, because the government wouldn’t have to issue as much debt to pay for it. Lower debt issuance “could prove relatively benign for bonds, the dollar and gold.”