Home / Business / Equity market leaders appear to be the most vulnerable to Biden’s tax plan

Equity market leaders appear to be the most vulnerable to Biden’s tax plan



Major US tech stocks appear vulnerable to a corporate tax hike that could result from a Democratic sweep in November, potentially undermining one of the strongest drivers of the market recovery this year.

Together, the tax proposals would reduce expected earnings among companies in the S&P 500 by 9.2%, according to estimates by BofA Global Research. And the pain would be more acute in some areas than others.

According to BofA’s analysis, Biden’s tax plan would lead to an estimated double-digit percentage decrease in profits for the information technology, communications services and consumer discretionary sectors. Those groups, who are leading the charge in the S&P 500 this year, are hosting

Apple Inc.,

AAPL -3.23%

Microsoft Corp.

MSFT -2.95%

, Parent of Google

Alphabet Inc.,

GOOG -2.13%

Facebook Inc.

FB -2.51%

is

Amazon.com Inc.

AMZN -2.99%

A disproportionate blow to earnings could challenge the leadership of those stocks – which helped isolate the market during the pandemic – and test the duration of the 2020 rally. The S&P 500 is up 50% from its late March low and increased 3.6% for the year.

“The concern is that you have these growth-oriented sectors that have been the main drivers since the March lows,” said Chad Oviatt, director of investment management at Huntington Private Bank. “Do they still have the same headwinds they have or does the idea of ​​the tax implications produce a headwind for them that the markets are not currently evaluating?”

The Biden campaign cited a recent Moody’s Analytics report saying 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, hopes and aspirations … of all American working families,” a campaign official said. “There is no reason why a business plan that asks everyone to pay their fair share by doing more to reach full employment faster with more jobs and stronger growth shouldn’t help everyone from essential workers to investors “.

As the coronavirus pandemic shut down much of the economy and pushed a growing share of lives online, investors flocked to tech-focused stocks that were positioned to take advantage of it. Shares of Amazon were up 69% in 2020, while Apple and Microsoft were up 54% and 31% respectively. Facebook was up 27% and Alphabet gained 8.7%.

Corporate earnings are the main driver of long-term equities. However, in recent years, stock prices have risen faster than profits. Apple stock, for example, has doubled since 2018, while its profits have remained relatively stable.

Overall, earnings are expected to start rebounding next year from the coronavirus-induced decline of 2020. Analysts polled by FactSet predict that profits among the S&P 500 companies will increase by 26% in 2021.

The three S&P 500 sectors who led the index this year are predicted to be the most vulnerable to Democratic presidential candidate Joe Biden’s fiscal proposal.

PERFORMANCE INDEX, YEAR TO TODAY

IMPACT ON THE ESTIMATED INCOME OF THE TAX PROPOSALS OFFERED

Note: BofA Global Research estimates exclude the utilities sector and real estate investment funds.

Sources: FactSet (index performance); BofA Global Research (impact on earnings)

The three S&P 500 sectors who led the index this year are predicted to be the most vulnerable to Democratic presidential candidate Joe Biden’s fiscal proposal.

PERFORMANCE INDEX, YEAR TO TODAY

IMPACT ON THE ESTIMATED INCOME OF THE TAX PROPOSALS OFFERED

Note: BofA Global Research estimates exclude the utilities sector and real estate investment funds.

Sources: FactSet (index performance); BofA Global Research (impact on earnings)

The three S&P 500 sectors who led the index this year are predicted to be the most vulnerable to Democratic presidential candidate Joe Biden’s fiscal proposal.

PERFORMANCE INDEX, YEAR TO TODAY

IMPACT ON THE ESTIMATED INCOME OF THE TAX PROPOSALS OFFERED

Note: BofA Global Research estimates exclude

the utilities sector and real estate investment funds.

Sources: FactSet (index performance); BofA Global Research (impact on earnings)

The three S&P 500 sectors who led the index this year are predicted to be the most vulnerable to Democratic presidential candidate Joe Biden’s fiscal proposal.

INDEX PERFORMANCE, YEAR TO TODAY

IMPACT ON ESTIMATED USERS

OF OFFERED TAX PROPOSALS

Note: BofA Global Research estimates exclude the utilities sector and real estate investment funds.

Sources: FactSet (index performance);

BofA Global Research (impact on earnings)

Investors will be able to take a new look at the health of big tech companies and others at the end of the month when the third quarter earnings season kicks off in earnest. This week, they will review data on unemployment claims to gauge how quickly the labor market is recovering.

Many investors have said conditions are optimal for a revival in value stocks, indicating an improvement in the economy, potentially accelerated by the introduction of a coronavirus vaccine. Value stocks, which outperformed their growing counterparts in September, are often defined as those that trade at a low multiple of their book value or net worth.

According to Lisa Shalett, Chief Investment Officer, Morgan Stanley Wealth Management bought shares of industrial, materials and financial companies in the spring, reducing its position in technology, according to the forecast of a strong economic recovery.

The proposed tax changes “would help accelerate industry rotation because the relative impact would likely be greater on some of the companies that have dominated,” he said.

Effective tax rates and net profit, by year

Alphabet

Amazon.com

Apple

Facebook

Microsoft

Alphabet

Amazon.com

Apple

Facebook

Microsoft

Alphabet

Amazon.com

Apple

Facebook

Microsoft

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

Sources: FactSet (tax rates and corporate income); S&P Dow Jones Indices (S&P 500 Average Tax Rate)

Effective tax rates and net profit, by year

Alphabet

Amazon.com

Apple

Facebook

Microsoft

Alphabet

Amazon.com

Apple

Facebook

Microsoft

Alphabet

Amazon.com

Apple

Facebook

Microsoft

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

Sources: FactSet (tax rates and corporate income); S&P Dow Jones Indices (S&P 500 Average Tax Rate)

Effective tax rates and net profit, by year

Alphabet

Amazon.com

Apple

Facebook

Microsoft

Alphabet

Amazon.com

Apple

Facebook

Microsoft

Alphabet

Amazon.com

Apple

Facebook

Microsoft

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

Sources: FactSet (tax rates and corporate income); S&P Dow Jones Indices (S&P 500 Average Tax Rate)

Effective tax rates and net profit, by year

Alphabet

Amazon.com

Apple

Facebook

Microsoft

Alphabet

Amazon.com

Apple

Facebook

Microsoft

Alphabet

Amazon.com

Apple

Facebook

Microsoft

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

Sources: FactSet (tax rates and corporate income); S&P Dow Jones Indices (S&P 500 Average Tax Rate)

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

Another wildcard for big tech companies is the possibility of regulatory crackdowns. The Federal Trade Commission is preparing to file a possible antitrust lawsuit against Facebook, and federal and state authorities have been investigating Google on a number of potential antitrust issues, the Wall Street Journal reported. Facebook defended its acquisitions, saying apps like Instagram became more popular because Facebook made them better. Google said its products expand competition and create a level playing field for small businesses.

Analysts at Goldman Sachs Group Inc. also raised the possibility of a change in momentum in the stock market, in part due to Biden’s request to raise the capital gains tax rate.

Past hikes have hit market leaders particularly hard ahead of the hike, analysts wrote in a recent report.

However, investors caution against drawing firm conclusions on the performance of the shares following any tax changes. They also note that Biden is unlikely to be able to raise taxes unless Democrats also gain control of the Senate, and that even then, any further downturn in the economy could lead to a delay in the attempt to raise.

Biden’s proposal to raise foreign income taxes is expected to hurt tech stocks. The former vice president arrived at a Wisconsin aluminum plant on September 21.


Photo:

jim watson / Agence France-Presse / Getty Images

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

“All things being equal, the tax hike is bad for equity investors, but everything else is never the same,” said David Donabedian, chief investment officer of CIBC Private Wealth Management. “Other things always happen.”

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Other investors say the pace of the economic recovery, success in countering the coronavirus, and the Federal Reserve’s commitment to keeping interest rates close to zero will play a more important role in determining the trajectory of the stock market. K

Furthermore, even when an election result is known, it is not always clear how the markets will react. Trump’s surprise victory four years ago caused stock futures to drop sharply overnight. But stocks rallied the next day and rose to records, supported by 2017 tax cuts and the strength of the global economy.

Another poignant piece of the puzzle: Biden’s proposals call for trillions of dollars in new spending, including a plan to combat climate change while rebuilding the country’s infrastructure.

“A sharp rise in fiscal spending, financed in part by rising tax revenues, would spur economic growth and help offset the headwind in earnings from higher tax rates,” Goldman analysts wrote.

Write to Karen Langley at karen.langley@wsj.com

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