Major U.S. Technologi shares are sensitive to the rise in corporate-tax, which could lead to a Democratic sweep in November, potentially reducing one of the strongest drivers of market recovery this year.
Bofa Global Research estimates that the tax proposals will reduce the expected revenue of companies in the S&P 500 by 9.2%. And the pain will be more intense than others in some areas.
Boffen’s analysis states that Mr. Biden’s tax plan will reduce the estimated double-digit percentage of profits for the information-technology, communications-services and consumer-discretionary sectors. The groups that are leading the charge in the S&P 500 this year are Apple’s home. Inc.,
AAPL -3.23%
Micro .ft Corpo.
MSFT -2.95%
, Google parent alphabet Inc.,
Google -2.13%
Facebook Inc.
FB -2.51%
And Amazon.com Inc.
AMZN -2.99%
The disproportionate blow to earnings could challenge the leadership of those stocks – which have helped insulate the market during the epidemic and test the sustainability of the 2020 boom. The S&P 500 rose 50% from its lows at the end of March and is up 3.6% for the year.
“The concern is that compared to March, you have these growth areas that have been the primary drivers,” said Chad Oviet, director of investment management at Huntington Private Bank. “Do they still have the same tailwinds they have, or does the idea of tax suggestions create a headache for them that the markets don’t currently set prices?”
A recent report by Capital Analytics in the Biden campaign cites that candidate plans will lead to growth and job creation. Biden’s focus is on the real economy and how it affects the economic well-being, hopes and aspirations of all American working families, a campaign official said. “There is no reason why an economic plan that tells everyone to pay their fair share to reach faster employment with increasing employment and strong growth should not help everyone, from essential workers to investors.”
As the coronavirus epidemic shuts down much of the economy and a growing chunk of life is being pushed online, so investors in tech-focused stocks. Shares of Amazon rose 69% in 2020, while Apple and Micro .ft rose 54% and 31%, respectively. Facebook is up 27% and Alphabet is up 8.7%.
Corporate earnings are the biggest driver of long-term stocks. However, in recent years, share prices have risen faster than profits. Apple Pal’s stock, for example, has doubled since 2018, when its profits have been relatively stable.
Most likely, revenue is expected to resume next year from the 2020 coronavirus-induced slide. Analysts surveyed by Factset expect profits among S&P 500 companies to grow by 26% in 2021.
This Three S&P 500 sectors Democratic presidential candidate Joe Biden, who has led the index this year, is believed to be the most sensitive to the tax proposal.
Indicative performance, anniversary from date
Influence of established earnings from Biden tax proposals
Note: The utilities sector and real estate investment trusts will be excluded from Bofa Global Research’s estimates.
Sources: Factset (index effect); Bofa Global Research (Revenue Performance)
This Three S&P 500 sectors Which led to the index this year is believed to be the most sensitive to Democratic presidential candidate Joe Biden’s tax proposal.
Indicative performance, anniversary from date
Influence of established earnings from Biden tax proposals
Note: The utilities sector and real estate investment trusts will be excluded from Bofa Global Research’s estimates.
Sources: Factset (index effect); Bofa Global Research (Revenue Performance)
This Three S&P 500 sectors Which led to the index this year is believed to be the most sensitive to Democratic presidential candidate Joe Biden’s tax proposal.
Indicative performance, anniversary from date
Influence of established earnings from Biden tax proposals
Note: BOFA excludes global research estimates
Utilities sector and real estate investment trusts.
Sources: Factset (index effect); Bofa Global Research (Effect of Earnings)
This Three S&P 500 sectors Which led to the index this year is believed to be the most sensitive to Democratic presidential candidate Joe Biden’s tax proposal.
Indicative performance, anniversary from date
Influence of established earnings
Biden Tax Proposals
Note: The utilities sector and real estate investment trusts will be excluded from Bofa Global Research’s estimates.
Sources: Factset (index effect);
Bofa Global Research (Revenue Performance)
As the third-quarter earnings season begins eagerly, investors will get a fresh look at the health of big tech companies and others earlier this month. This week, they will examine unemployment-claims data for a gauge of how quickly the labor market is recovering.
Many investors have said that the conditions for a resurgence in value stocks are key, pointing to a improving economy, potentially accelerated by the deployment of the coronavirus vaccine. Value stocks, which outperformed their growth counterparts in September, are often defined as those that trade at a lower multiple of their book value or net worth.
Strong economic recovery forecasts will boost cyclone stocks, Chief Investment Officer Fischer Lisa Schultz said, adding that Morgan Stanley Wealth Management streamlined the technology position of industrial, material and financial companies.
The proposed tax changes will “help to accelerate the circulation of the sector as it will affect the companies that dominate,” he said.
Effective tax rates and net income, by year
Alphabet
Amazon.com
Apple
Micro .ft
Alphabet
Amazon.com
Apple
Micro .ft
Alphabet
Amazon.com
Apple
Micro .ft
Note: Alphabet’s 2017 and Micros.ft’s 2018 tax rates were unusually high because of the one-time tax on foreign income under the 2017 tax law.
Sources: Factset (tax rates and income of companies); S&P Dow Jones Indices (S&P 500 Average Tax Rate)
Effective tax rates and net income, by year
Alphabet
Amazon.com
Apple
Micro .ft
Alphabet
Amazon.com
Apple
Micro .ft
Alphabet
Amazon.com
Apple
Micro .ft
Note: Alphabet’s 2017 and Micros.ft’s 2018 tax rates were unusually high because of the one-time tax on foreign income under the 2017 tax law.
Sources: Factset (tax rates and income of companies); S&P Dow Jones Indices (S&P 500 Average Tax Rate)
Effective tax rates and net income, by year
Alphabet
Amazon.com
Apple
Micro .ft
Alphabet
Amazon.com
Apple
Micro .ft
Alphabet
Amazon.com
Apple
Micro .ft
Note: Alphabet’s 2017 and Micros.ft’s 2018 tax rates were unusually high because of the one-time tax on foreign income under the 2017 tax law.
Sources: Factset (tax rates and income of companies); S&P Dow Jones Indices (S&P 500 Average Tax Rate)
Effective tax rates and net income, by year
Alphabet
Amazon.com
Apple
Micro .ft
Alphabet
Amazon.com
Apple
Micro .ft
Alphabet
Amazon.com
Apple
Micro .ft
Note: Alphabet’s 2017 and Micros.ft’s 2018 tax rates were unusually high because of the one-time tax on foreign income under the 2017 tax law.
Sources: Factset (tax rates and income of companies); S&P Dow Jones Indices (S&P 500 Average Tax Rate)
Mr Biden’s proposal for a higher tax on foreign income is likely to hit tech stocks particularly hard. According to Factset estimates, the tech sector receives only 43.5% of its revenue from the US, compared to 60.3% of the S&P 500, according to Factset estimates.
Another wild card for big tech companies is likely to be slammed by regulators. The Federal Trade Commission is preparing to file a possible antitrust case against Facebook, and federal and state authorities have investigated various possible issues of trust to Google, according to the Wall Street Journal. Apps like Instagram have become more popular as Facebook has improved them, saying Facebook has defended its acquisition. Google says its products increase competition and equalize the playing field for small businesses.
Goldham Sachs Group Inc. Analysts have also raised the possibility of a change in the pace of the stock market, which was prompted by Mr Biden’s call for an increase in the top capital-gain tax rate.
Past analysts have written in a recent report that past increases have hit market leaders particularly hard before growth.
Still, investors are wary of the crucial findings of what stocks will do in the wake of any tax changes. They also note that Mr Biden is unlikely to succeed in raising taxes unless the Democrats win the Senate, and even then a further slowdown in the economy could lead to a delay in additional efforts.
Mr Biden’s proposal for a higher tax on foreign income is likely to hurt tech stocks. The former vice president arrived at the Wisconsin aluminum facility on Sept. 21.
Photo:
Jim Vatson / Agency France-Press / Getty Images
In 1993, President Clinton signed a deficit-reduction package that raised corporate income taxes. The S&P 500 made small losses in 1994, but gained a double-digit percentage gain each year for the rest of the decade, a time of technological innovation and increasing globalization.
David Donabedian, chief investment officer at CIBC Private Wealth Management, said that while all the rest are the same, the tax increase is negative for equity investors, but all the rest are never the same. “There are always other things going on.”
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Other investors say the pace of economic recovery, success in coronavirus and the Federal Reserve’s commitment to keep interest rates close to zero will play a big role in determining the path of the stock market. That
Also, even though the election result is known, it is not always clear how the markets will react. Mr. Trump’s surprise victory four years ago saw a sharp drop in stock futures overnight. But the next day saw stocks rise and the global economy moved to record highs due to the 2017 tax cuts and strengths.
Another turning point in the puzzle: Mr Biden’s proposals call for trillions of dollars in new costs, including plans to tackle climate change while rebuilding the country’s infrastructure.
“A large increase in financial spending as tax revenue increases will accelerate economic growth and help drive earnings from higher tax rates,” analysts at Goldman anal wrote.
Write to Karen Langley at [email protected]
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