Stock market leaders are most vulnerable to Biden tax plan



Major US technology stocks appear vulnerable to corporate-tax hikes, which may have resulted from a Democratic sweep in November, potentially one of the strongest drivers of market recovery this year.

According to BofA Global Research estimates, the tax proposals would reduce the estimated earnings among companies in the S&P 500 by 9.2%. And the pain will be more intense in some areas than in others.

Mr. Biden’s tax plan will lead to an estimated double-digit percentage drop in profits for the information-technology, communications-services and consumer-discretionary sectors, BofA’s analysis. This year the group that heads the S&P 500 are Apple’s home Inc.

AAPL -3.23%

Microsoft Corp.

Msft -2.95%

, Google Original Alphabet Inc.

GOOG -2.13%

Facebook Inc.

American Plan -2.51%

And Amazon.com Inc.

AMZN -2.99%

An unsympathetic hit to earnings could challenge the leadership of those stocks – which have helped save the market during the epidemic – and test the sustainability of the 2020 rally. The S&P 500 increased 50% from its low at the end of March and increased 3.6% for the year.

“The concern is that you have these growth-oriented sectors that have been the primary drivers since March,” said Chad Oviatt, director of investment management at Huntington Private Bank. “Do they still have the same tailwind that they have, or does the idea of ​​tax implications produce a headwind for those not currently pricing in the market?”

The Biden campaign said the candidate’s plans would generate employment and spur growth. A campaign official said, “Joe Biden’s focus is on the real economy and how it impacts the economic well-being, hopes and aspirations of all American working families.” “There is no reason why an economic plan that calls for everyone to give their fair share to work quickly with more and more jobs to provide their jobs and not all help from workers to investors is essential for strong growth Should do. ”

As the coronavirus virus epidemic shut down the economy and pushed a growing share of lives online, investors flocked to technology-intensive stocks that were positioned to profit. Amazon shares have increased 69% in 2020, while Apple and Microsoft are up 54% and 31% respectively. Facebook has climbed 27%, and Alphabet has risen 8.7%.

Corporate income is the biggest driver of stocks in the long term. However, in recent years, share prices have climbed faster than profits. For example, Apple’s shares have more than doubled since 2018, while its profits have remained relatively stable.

Broadly, earnings from the 2020 coronavirus-inspired slide are expected to begin next year. Analysts polled by FactSet expect profits among companies in the S&P 500 to grow by 26% in 2021.

Three S&P 500 Sector This year has led the index which is estimated to be the weakest for the tax proposal of Democratic presidential candidate Joe Biden.

Index performance, year to date

Impact of estimated income of Beiden Tax Prospects

Note: BofA Global Research estimates the utilities sector and real estate investment to leave trusts.
Source: FactSet (Index Display); BofA Global Research (Earnings Effect)

Three S&P 500 Sector This year has led the index which is estimated to be the weakest for the tax proposal of Democratic presidential candidate Joe Biden.

Index performance, year to date

Impact of estimated income of Beiden Tax Prospects

Note: BofA Global Research estimates the utilities sector and real estate investment to leave trusts.
Source: FactSet (Index Display); BofA Global Research (Earnings Effect)

Three S&P 500 Sector This year has led the index which is estimated to be the weakest for the tax proposal of Democratic presidential candidate Joe Biden.

Index performance, year to date

Impact of estimated income of Beiden Tax Prospects

Note: BofA Global Research estimates
Utilities Sector and Real Estate Investment Trust.
Source: FactSet (Index Display); BofA Global Research (Earnings Effect)

Three S&P 500 Sector This year has led the index which is estimated to be the weakest for the tax proposal of Democratic presidential candidate Joe Biden.

Index performance, year to date

Estimated Income Impact

BIDEN TAX OFFER

Note: BofA Global Research estimates the utilities sector and real estate investment to leave trusts.
Source: FactSet (Index Display);
BofA Global Research (Earnings Effect)

Investors will get a facelift on the health of big tech companies and others later this month, when the third-quarter earnings season closes in earnest. This week, they will examine jobless-claims data to see how quickly the labor market is recovering.

Several investors have stated that conditions are prime for revival in value stocks, pointing to a better economy, potentially accelerated by the deployment of the coronovirus vaccine. Value stocks, which outperform their growth counterparts in September, are often defined as those that trade at a lower multiplier of their book value, or net worth.

Chief investment officer Lisa Chalet said the strong economic recovery would boost cyclical stocks, with Morgan Stanley Wealth Management buying shares of industrial, materials and financial companies in the spring.

He said the proposed tax change would “help accelerate the rotation of that sector because the relative impact would probably be larger on some of the companies that have come to dominate,” she said.

Effective tax rate and net income, by year

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Note: Alphabet’s 2017 and Microsoft’s 2018 tax rates were unusually high due to the one-time tax on foreign income under the 2017 tax law.
Sources: FactSet (tax rates and income of companies); S&P Dow Jones Indices (S&P 500 Average Tax Rate)

Effective tax rate and net income, by year

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Note: Alphabet’s 2017 and Microsoft’s 2018 tax rates were unusually high due to the one-time tax on foreign income under the 2017 tax law.
Sources: FactSet (tax rates and income of companies); S&P Dow Jones Indices (S&P 500 Average Tax Rate)

Effective tax rate and net income, by year

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Note: Alphabet’s 2017 and Microsoft’s 2018 tax rates were unusually high due to the one-time tax on foreign income under the 2017 tax law.
Sources: FactSet (tax rates and income of companies); S&P Dow Jones Indices (S&P 500 Average Tax Rate)

Effective tax rate and net income, by year

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Alphabet

Amazon.Com

Apple

Facebook

Microsoft

Note: Alphabet’s 2017 and Microsoft’s 2018 tax rates were unusually high due to the one-time tax on foreign income under the 2017 tax law.
Sources: FactSet (tax rates and income of companies); S&P Dow Jones Indices (S&P 500 Average Tax Rate)

Mr. Biden’s proposal for higher taxes on foreign income is expected to hit particularly hard technical stocks. According to FactSet’s estimate, the tech sector accounts for just 43.5% of revenue from the US, compared to 60.3% for the S&P 500.

Another wild card for big tech companies is the possibility of action by regulators. The Fed Street Journal has reported that the Federal Trade Commission is gearing up to file a possible antitrust lawsuit against Facebook, and federal and state officials have investigated Google, The Wall Street Journal has reported. Facebook defended its acquisition, saying that apps such as Instagram became more popular as Facebook reformed them. Google has stated that its products expand competition and expand the field of sports for small businesses.

Goldman Sachs Group Inc. analysts have also increased the likelihood of a change in momentum in the stock market, partly due to Mr. Biden’s call to raise the top capital gains tax rate. Analysts wrote in a recent report that the past days’ growth has outpaced market leaders.

Nevertheless, investors are cautioned to draw concrete conclusions about the performance of the shares in view of any tax changes. He also noted that Mr Biden would be unlikely to succeed in raising taxes until Democrats also win control of the Senate, and even then, any further deterioration in the economy is delayed in trying to increase Can.

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


Photo:

Jim Watson / Agnes France-Presse / Getty Images

In 1993, President Bill Clinton signed a deficit reduction package, which increased the corporate income tax. The S&P 500 recorded a small loss in 1994, but achieved double-digit percentage gains each year for the rest of the decade, a time of technological innovation and growing globalization.

“All else being equal, the tax increase is a downside for equity investors, but not all others are equal,” said David Donabedian, chief investment officer of CIBC Private Wealth Management. “There’s always other stuff going on there.”

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Other investors say the pace of economic recovery, success in combating coronaviruses, and the Federal Reserve’s commitment to keep interest rates near zero will play a large role in determining stock market estimates. And BofA analysts cautioned that their research suggests there is little correlation between tax rates and regulations and market returns.

Furthermore, even when an election result is known, it is not always clear how the market will react. Four years ago Mr. Trump’s surprise victory led to a steep decline in stock futures overnight. But shares rallied the next day and climbed to the record as 2017 tax increases and the global economy strengthened.

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

Analysts at Goldman said, “The large increase in fiscal spending, funded by an increase in tax revenue, will boost economic growth and help keep earnings away from higher tax rates.”

Write Karen Langley at [email protected]

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