A Century of Data Show Markets Far From Impervious to Tax Hikes

The prospect of tax hikes may not have derailed gains in U.S. stocks yet, but 100 years of data say the market is far from impervious to them.

Stocks can take a hit when rates rise on corporations and individuals, according to Julian Emanuel, chief equity and derivatives strategist at BTIG LLC. He sees 13 such instances, most recently in 1993. The average return on the U.S. benchmark index in the years of the combined hikes is 2.4%, and drops to -0.9% for the year following. That compares with a long-run annual average of 7.7%, Emanuel notes.

“‘Common wisdom’ has it that equities are indifferent to tax hikes,” Emanuel wrote. “They aren’t.”

U.S. President Joe Biden’s $2.25 trillion infrastructure-centered plan includes tax hikes that, among other things, would boost the corporate rate to 28% from 21%. It doesn’t include raising taxes on the wealthy, though such a proposal is likely in another related package. So far equities haven’t seemed to mind much, with the S&P 500 Index breaching 4,000 for the first time Thursday. Thin Democratic majorities in both the House and Senate means the proposal could struggle against Republican opposition.

A Century of Data Show Markets Far From Impervious to Tax Hikes

The broad stock-market impact from the infrastructure plan as it stands looks modest to the likes of Goldman Sachs Group Inc. Chief equity strategist David Kostin estimated in mid-March that the proposed corporate tax hikes could shave roughly 3% off S&P 500 earnings in 2022. JPMorgan Chase & Co. strategists Shawn Quigg and Marko Kolanovic wrote last week that they’re looking out for deterioration in stocks that benefited from the 2017 reductions, which cut the corporate tax rate from 35%.

Moreover, Emanuel anticipates only a near-term hit to the index, while economic and earnings growth fueled by central bank and government stimulus could drive “an overshoot to as high as 5,047” by the end of this cycle.

©2021 Bloomberg L.P.

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