- The upcoming U.S. presidential election is a potential threat to the stock market.
- Joe Biden’s tax plan includes corporate tax hikes.
- Lower company earnings will send the stock market lower.
If you own stocks, you should know that a Biden victory is bearish for the market.
Biden’s Tax Plan Could Cut Earnings Drastically
Goldman has warned that a Democratic sweep would be bad for the U.S. stock market. Biden’s tax plan, which might pass if he’s elected, could cut S&P 500 earnings by as much as 12%.
The risk that it will happen is rising as the odds of a Democratic sweep grows amid the pandemic and civil unrest. Biden is 14 points ahead in a major new poll from the New York Times and Siena College.
The 2020 elections add to the earnings uncertainty created by the coronavirus. The odds of a Democratic sweep in November have increased substantially since February and now stand above 50%. If enacted, we estimate that the Biden tax plan would reduce our S&P 500 earnings estimate for 2021 by $20 per share, from $170 to $150.
Goldman’s estimate is based on higher statutory federal taxes for domestic income (from 21% to 28%), the doubling of the tax rate on certain foreign income, the addition of another payroll tax on high earners, and a minimum tax rate of 15%.
That’s how Biden plans to finance his “buy American” economic plan.
A Democratic Sweep Is Bearish For The Stock Market
Trump signed the Tax Cuts and Jobs Act in late 2017, which lowered the rate businesses pay on their earnings from 35% to 21%. Many market players see the tax overhaul as a critical driver of the stock market run-up in the past two years.
Under a Biden presidency, companies will pay more taxes. Higher taxes will hit their bottom line, which in turn will hurt their stock prices. Company earnings are already under pressure due to the pandemic. A tax hike will only worsen the situation.
Analysts expect a 44.6% drop in second-quarter earnings, the highest since 2008’s fourth-quarter. The outlook for the third quarter is also bleak, with EPS expected to drop by 24.4%.
About a third of S&P 500’s companies have withdrawn their financial guidance.
Companies with the highest effective tax rates face significant risk from a potential rate hike. These include several industrial giants like Boeing (NYSE:BA). Information technology companies like Nvidia (NASDAQ:NVDA) could also see their earrings hit by a tax hike.
The rally in stocks over the past few months has been driven by five mega-cap companies expected to benefit in a post-pandemic world: Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), and Alphabet (NASDAQ:GOOGL).
These companies alone have a combined weighting of more than 20% of the S&P 500. Higher taxes will impact their earnings, putting downward pressure on their stock prices and the overall market.
SMH Group CEO George Ball predicts that a Biden victory in November could send the stock market 25% lower.
A Biden victory will likely be disastrous for the stock market. Like it or not, a Trump reelection would probably be better for equities.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author owns shares of Microsoft.