The federal government is on track to continue a spending spree that’s injected trillions of dollars into the economy, but investors may soon be bracing for the T-word.
Taxes, specifically corporate tax hikes, are likely to work their way on to the radar screen as President Joe Biden prepares what’s expected to be a multitrillion dollar package of infrastructure spending.
So is it time for stock-market investors to head for the hills? Not quite.
In fact, it might be difficult to discern the impact of tax-hike worries because the potential impact “will look somewhat similar to the cyclical reflation we see right now,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments, in an interview. She was referring to the rotation away from previously high-flying growth stocks toward more economically sensitive cyclical stocks.
Growth stocks — shares of companies whose revenue and earnings are expected to grow faster than their peers — are seen as the most vulnerable to rising tax rates. Growth stocks, which soared through much of the pandemic, are feeling pressure from rising bond yields, which make it more difficult for investors to justify their lofty valuations.
The past week saw the tech-heavy Nasdaq Composite
COMP,
slip 0.58%, leaving it up just 1.94% for the year. The S&P 500
SPX,
saw a weekly rise of 1.57%, while the Dow Jones Industrial Average
DJIA,
edged up 1.36%. The S&P 500 remains up 5.82% for the year, while the Dow is up 8.06%.
So what’s on the table? A partial unwinding of the 2017 corporate tax cut, which lowered the rate from 35% to 21%, is seen as the most likely outcome. A rise in the top personal income tax rate and an overhaul of the estate tax are also potential candidates. More ambitious measures on Democrats’ wish list include a wealth tax and a hike in the capital gains tax rate.
Read: Biden may propose $1 trillion in new taxes, says a former aide — and here’s how Congress will react
The Biden administration has yet to roll out a full-fledged plan for infrastructure spending or any accompanying tax increases. During the presidential campaign, Biden called for raising the corporate tax rate on domestic income to 28%, while also raising the tax rate on foreign income, known as the GILTI tax, and instituting a minimum corporate tax rate.
A 28% tax rate would clip corporate earnings by 9% in 2022, estimated equity analysts led by David Kostin at Goldman Sachs, in a March 19 research note.
Goldman’s economists, however, expect Congress to pass a smaller increase, Kostin and company noted. The analysts, therefore, look for a hike in the corporate tax rate to 25%, which they estimate would result in a 3% drag on earnings. A bigger hike, or the passage of other measures like an…
Read More: Here’s what tax hikes could mean for the stock market as Biden pushes