Goldman Team Says U.S. Stocks Take Biden Tax Plan in Stride
(Bloomberg) -- President Joe Biden’s potential tax hikes will likely deal only a temporary blow to U.S. equities thanks to the tide of fiscal spending, including the prospect of growth-friendly infrastructure outlays, strategists said.
Stocks are pricing in the good news around infrastructure 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 75% over the past year, helped by huge injections of stimulus. Strategists said Biden’s plans for the first major federal tax hike since 1993 for programs like infrastructure and fighting climate change will weigh on company earnings and equity allocations in the short term.
The evaluations are tentative pending more details on how levies will change. Many in Congress remain opposed to tax increases amid the pandemic.
Higher corporate taxes are likely to cut S&P 500 earnings by 3% in 2022, the Goldman strategists said, while a JPMorgan Chase & Co. team led by John Normand said they 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% -- as well as 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. JPMorgan said they “could trigger pre-emptive selling before the tax year ends.”
Normand’s team also pointed to how recent stimulus steps and the reopening of economies should lead to “extraordinary growth and profits momentum.” 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.
Funding the infrastructure plan would imply much less pressure on bond yields than the two recent Covid-19 stimulus packages, according to JPMorgan, 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,” the team added.
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