Wall Street has wrestled with the potential effects of President Joe Biden’s $1.9 trillion fiscal stimulus. Soon it will be sizing up his tax plan, with likely proposals for higher corporate taxes as well as increased income and capital-gains taxes on high earners.
Many highly valued growth stocks, however, have come under pressure even as Treasury rates stabilized. That was felt in the Nasdaq Composite, which declined 0.6% for the week. The
exchange-traded fund (ticker: ARKK), a speculative benchmark, given its holdings of stocks like
(ROKU), was down 6.9% for the week, leaving it with a decline of 8.5% for the year.
Biden has talked about lifting the corporate tax rate to 28% from 21%.
strategist David Kostin wrote this past week that his firm sees a 25% rate as more likely. A 25% rate and other measures to boost corporate tax collections would cut Goldman’s 2022 earnings estimate for the S&P 500 by 3%, to $197 a share, while a 28% rate would result in a 9% reduction, to $185 share.
That means the S&P 500 at 3974 is trading for about 20 times Goldman’s projected 2022 earnings, assuming a 25% rate.
“To some extent, higher taxes are priced into the market,” says Byron Wien, senior investment strategist at the
“Since Biden was elected, people have gotten prepared for that.” It’s also possible that investors expect Senate Republicans and moderate Democrats to block any move to lift corporate taxes.
Wien sees some upside for the S&P 500 this year, along with higher rates, including a 2%-plus yield on the 10-year Treasury, now yielding 1.68%: “At these levels of interest rates, the S&P 500 can support a (price/earnings) multiple of 20 or more.”
One thing that’s getting little attention is deficit spending. Strategas Washington analysts project that the U.S. budget deficit will total $3.4 trillion in the current fiscal year, or 16% of gross domestic product, wider than $3.1 trillion in fiscal 2020. Strategas sees a still-substantial $1.5 trillion deficit in fiscal 2022. Bond and stock investors seem to accept Ronald Reagan’s comment: “I’m not worried about the deficit. It’s big enough to take care of itself.” That could prove optimistic.
The market for special purpose acquisition companies, or SPACs, is cooling off.
SPACs are blank-check vehicles that raise money and then seek to merge with an existing…