A corporate tax increase stemming from a Democratic victory in November could undermine one of the strongest drivers of this year’s market recovery, market analysts say.
Together, the tax proposals would reduce expected earnings among companies in the S&P 500 by 9.2%, according to estimates from BofA Global Research. The effects would especially hit technology companies.
Mr. Biden’s plan would produce estimated double-digit percentage declines in profits in the information-technology, communication-services and consumer-discretionary sectors, BofA’s analysis found. Those sectors, which are leading the charge in the S&P 500 this year, are home to
, Google parent
Such a hit could challenge the leadership of those stocks—which have helped insulate the market during the pandemic—and test the durability of the 2020 rally.
The S&P 500 has surged 50% from its low in late March and is up 3.6% for the year.
“The concern there is that you have these growth-oriented sectors that have been the primary drivers since the March lows,” said Chad Oviatt, director of investment management at Huntington Private Bank. “Do they still have the same tailwinds that they’ve had, or does the idea of tax implications produce a headwind for them that the markets aren’t currently pricing in?”
The Biden campaign cited a recent Moody’s Analytics report in saying the candidate’s plans would lead to growth and job creation. “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,” a campaign official said. “There is no reason that an economic plan that asks everyone to pay their fair share while doing more to reach full-employment quicker with more jobs and stronger growth should not help everyone from essential workers to investors.”
As the coronavirus pandemic shut down much of the economy and pushed an increasing share of life online, investors flocked to technology-focused stocks that were positioned to benefit. Amazon shares have surged 69% in 2020, while Apple and Microsoft are up 54% and 31%, respectively. Facebook has climbed 27%, and Alphabet has gained 8.7%.
Corporate earnings are the biggest driver of stocks over the long term. However, in recent years, stock prices have climbed faster than profits. Apple shares, for instance, have doubled since 2018, while its profits have been relatively stable.