Economy

Stock market leaders seem more vulnerable to Biden’s tax plan

Market analysts say the corporate tax hike stemming from the Democratic victory in November may undermine one of the strongest drivers of the market’s recovery this year.

Together, the tax proposals will reduce projected profits among companies in the S&P 500 by 9.2%, according to estimates from BofA Global Research. The effects will particularly hit tech companies.

A BofA analysis found that Mr. Biden’s plan would produce an estimated double-digit percentage decrease in profits in the IT, telecom, and consumer discretionary sectors. These sectors, which are driving the momentum in the S&P 500 this year, are home

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Such a blow could challenge leading those stocks – which helped isolate the market during the pandemic – and test the continuity of the 2020 rally.

The S&P 500 is up 50% from its lowest level in late March and up 3.6% for the year.

“The concern there is that you have these growth-oriented sectors that have been the main driver since the lowest levels in March,” said Chad Oviat, director of investment management at Huntington Private Bank. “Do they still have the same tail winds that they have, or is the idea of ​​the tax implications producing headwinds for them that the markets are not currently priced at?”

The Biden campaign cited a recent Moody’s Analytics report in which he said the candidate’s plans would lead to growth and job creation. “Joe Biden’s focus is on the real economy and how it affects the economic well-being and hopes and aspirations of all American working families,” a campaign official said. “There is no reason why an economic plan requiring everyone to pay their fair share while doing more to reach full employment faster with more jobs and stronger growth should not help everyone from basic workers to investors.”

As the coronavirus pandemic shuts down a large portion of the economy and drives a growing share of life online, investors have flocked to technology-focused stocks that were in a position to benefit. Amazon shares are up 69% in 2020, while Apple and Microsoft stocks are up 54% and 31%, respectively. Facebook is up 27%, and Alphabet is up 8.7%.

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Corporate earnings are the biggest driver of stocks in the long run. However, in recent years, stock prices have risen faster than earnings. For example, Apple’s shares have doubled since 2018, while its earnings have remained relatively stable.

Broadly, earnings are expected to begin to recover next year from the coronavirus-induced slide in 2020. Analysts polled by FactSet predict that intercompany profits in the S&P 500 will rise 26% in 2021.

The Three segments S&P 500 That led the index this year, is expected to be the most vulnerable to Democratic presidential candidate Joe Biden’s tax proposal.

Index performance, year-to-date

The estimated gain effect of the Biden tax proposals

Note: Bofa Global Research’s estimate excludes utilities and real estate investment funds.

Sources: FactSet (Performance Index); BofA Global Research (Earning Impact)

The Three segments S&P 500 That led the index this year, is expected to be the most vulnerable to Democratic presidential candidate Joe Biden’s tax proposal.

Index performance, year-to-date

The estimated gain effect of the Biden tax proposals

Note: Bofa Global Research’s estimate excludes utilities and real estate investment funds.

Sources: FactSet (Performance Index); BofA Global Research (Earning Impact)

The Three segments S&P 500 That led the index this year, is expected to be the most vulnerable to Democratic presidential candidate Joe Biden’s tax proposal.

Index performance, year-to-date

The estimated gain effect of the Biden tax proposals

Note: Estimates by BofA Global Research are excluded

Utilities sector and real estate investment funds.

Sources: FactSet (Performance Index); BofA Global Research (Earning Impact)

The Three segments S&P 500 That led the index this year, is expected to be the most vulnerable to Democratic presidential candidate Joe Biden’s tax proposal.

Index performance, year-to-date

Impact of estimated earnings

Biden tax offers

Note: Bofa Global Research’s estimate excludes utilities and real estate investment funds.

Sources: FactSet (Performance Index);

BofA Global Research (Earning Impact)

Investors will get a fresh look at the health of major tech companies and others later this month, when the third-quarter earnings season begins in earnest. This week, they will be examining the jobless claims data to gauge how fast the labor market is recovering.

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Several investors said the conditions are fundamental A rebound in equity value, In an indication of an improvement in the economy, and this will likely be accelerated by the publication of a vaccine for the Coronavirus. Value stocks, which outperformed their peers by growth in September, are often defined as those that trade at a low multiplier for their book value or net worth.

Expecting a strong economic recovery that will boost cyclical stocks, Lisa Shalit, investment manager, said Morgan Stanley Wealth Management bought stakes in industrial, materials and financial firms in the spring while downsizing its position in technology.

She said that the proposed tax changes “will help accelerate the turnover of this sector because the relative impact may be greater on some of the companies that have dominated.”

Tax rates in effect and net income, by year

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Amazon.com

an Apple

The social networking site Facebook

Microsoft

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Amazon.com

an Apple

The social networking site Facebook

Microsoft

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Amazon.com

an Apple

The social networking site Facebook

Microsoft

Note: Alphabet’s tax rates for 2017 and Microsoft 2018 were unusually high due to a one-time tax on foreign income under the 2017 Tax Law.

Sources: FactSet (Corporate and Income Tax Rates); S&P Dow Jones Indexes (average S&P 500 tax rate)

Tax rates in effect and net income, by year

the alphabet

Amazon.com

an Apple

The social networking site Facebook

Microsoft

the alphabet

Amazon.com

an Apple

The social networking site Facebook

Microsoft

the alphabet

Amazon.com

an Apple

The social networking site Facebook

Microsoft

Note: Alphabet’s tax rates for 2017 and Microsoft 2018 were unusually high due to a one-time tax on foreign income under the 2017 Tax Law.

Sources: FactSet (Corporate and Income Tax Rates); S&P Dow Jones Indexes (average S&P 500 tax rate)

Tax rates in effect and net income, by year

the alphabet

Amazon.com

an Apple

The social networking site Facebook

Microsoft

the alphabet

Amazon.com

an Apple

The social networking site Facebook

Microsoft

the alphabet

Amazon.com

an Apple

The social networking site Facebook

Microsoft

Note: Alphabet’s tax rates for 2017 and Microsoft 2018 were unusually high due to a one-time tax on foreign income under the 2017 Tax Law.

Sources: FactSet (Corporate and Income Tax Rates); S&P Dow Jones Indexes (average S&P 500 tax rate)

Biden’s proposal for higher taxes on foreign income is expected to hurt tech stocks hard. The tech sector draws only 43.5% of its revenue from the US, compared to 60.3% for the S&P 500 as a whole, according to FactSet estimates.

The other primary card for major tech companies is the prospect of regulators’ crackdown. The Federal Trade Commission prepares To file a lawsuit against Facebook against the monopoly, Federal and state authorities They investigated Google On a host of potential antitrust issues, the Wall Street Journal reported. Facebook defended the acquisitions, saying that apps like Instagram had become more popular because Facebook had improved them. Google said its products expand competition and reward the playing field for small businesses.

Goldman Sachs Group Inc. Also the possibility of a momentum shift in the stock market, in part because of Mr. Biden A call for a higher rate of capital gains tax.

Analysts wrote in a recent report that previous increases hit market leaders before the increase in particular.

However, investors caution against drawing firm conclusions about how stocks will perform in the wake of any tax changes. They also note that Biden is unlikely to succeed in raising taxes unless the Democrats also win control of the Senate, and even then, any further downturn in the economy could delay the bid.

Biden’s proposal to impose higher taxes on foreign income is expected to hurt tech stocks. The former vice president arrived at the aluminum facility in Wisconsin on September 21.


Photo:

Jim Watson / AFP / Getty Images

In 1993, President Clinton signed a deficit reduction package that raised the corporate income tax. The S&P 500 recorded a small loss in 1994, but continued to post two-digit gains every year for the rest of the decade, which was a time of technological innovation and increased globalization.

“If all other things are equal, the tax increases are negative for equity investors, but everything else is never the same,” said David Dunabedian, chief investment officer at CIBC Private Wealth Management. “There’s always other things going on.”

Share your thoughts

Do you expect higher taxes to slow tech stocks’ momentum? Join the conversation below.

Other investors say the pace of the economic recovery, success in countering the Coronavirus, and the Federal Reserve’s commitment to keeping interest rates near zero will play a greater role in determining the path of the stock market.

Additionally, even when the outcome of an election is known, it is not always clear how the markets will react. Mr. Trump’s surprise win four years ago It led to a sharp drop in stock futures Overnight. But Shares rose the next day It continued to climb to record numbers, buoyed by the 2017 tax cuts and the strength of the global economy.

Another moving piece of the puzzle: Mr. Biden’s proposals Call for trillions of dollars in new spendingIncluding a plan to combat climate change while Rebuilding the country’s infrastructure.

“A substantial increase in fiscal spending, partly financed through increased tax revenues, will boost economic growth and help offset adverse profits from higher tax rates,” Goldman analysts wrote.

Write to Karen Langley at [email protected]

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