- BlackRock CEO Larry Fink sees a tax rate hike in the short-term, along with increased bankruptcies.
- The U.S. stock market would face significant selling pressure as corporate profits decline.
- Mounting geopolitical risks add to the risk of a stocks downtrend.
BlackRock CEO Larry Fink does not seem to believe in the recent stock market recovery. He believes a possible cascade of bankruptcies, a wrecked airline industry, and cautious consumers can bring down the momentum of the market.
Along with major Wall Street firms, Fink is advising U.S. President Donald Trump on reopening the economy. BlackRock’s essential role in assisting the Federal Reserve to steady markets gives weight to both the firm and CEO Fink’s forecasts on the future of the stock market.
Major Risk to Stock Market Rally is a Potential Tax Rate Hike
On a call with investors at a wealth advisory firm, Fink hinted the likelihood of corporate tax rate being raised to up to 29%, Bloomberg reported.
The Trump administration demonstrated enormous pride in the tax cuts it led. President Trump attributed much of the stock market rally in 2018 to 2019 to lower tax rates.
But, Fink reportedly said that he foresees both corporate and personal tax rates rising again in the short-term. The dire economic consequences the U.S. is about to endure from the coronavirus pandemic may force the hand of President Trump.
One key fundamental factor that continuously pushed the stock market to new highs in 2019 was stock buybacks.
The relatively low 21% corporate tax rate implemented in 2017 allowed large conglomerates to bring in significantly higher profits. The extra cash pile was then used to buy stocks back, causing a long-lasting stock market uptrend.
If the tax rate is increased to as high as 29% as predicted by Fink, it could make it challenging even for large companies to engage in stock buyback over the next year.
Declining cash flow of leading corporations and an expected cascade of small business bankruptcies could imply selling pressure on the stock market approaching the end of Q2 of this year.
Worst Storm For Equities: Rising Tax Rates and Tariffs
Another variable that may fuel the downtrend of the U.S. stock market is tariffs on Chinese goods.
The White House shifted the focus of the coronavirus pandemic from the U.S. to China, pointing at the Wuhab laboratory as a potential origin of coronavirus.
Secretary of State Mike Pompeo later downplayed comments about the lab, stating that the U.S. does not have enough evidence to conclusively form a link between the virus and the lab.
But, it was sufficient to tighten up the tension between the U.S. and China.
Mounting geopolitical risks during a time wherein businesses face mass bankruptcies as a result of the temporary shut down of the economy can have a long-term negative effect on the stock market.
Billionaire investor Mark Cuban heavily condemned the tariffs on China, referring to data that showed 71% of Americans are concerned about the tariffs.
Time to stop them immediately.
Over the next month, three factors would primarily sway the trend of the stock market: the faith of the corporate tax hike, how the U.S.-China trade talks plan out, and the outcome of reopening the economy.