Keep Your Eyes on Horizon for the Market’s Next Big Hurdle

A global pandemic, record unemployment, inflation, rising rates and bond yields.

Despite the stock market’s record bull run over the past year, investors have had no shortage of stress fuel along the way.

Well, as Yahoo Finance points on Tuesday morning, we could be in store for yet another fun hurdle in the near term.

In a financial landscape where everything is happening faster, it should come as no surprise that as soon as consensus fears shifted from a double-dip recession to higher inflation, another fear has come along. Higher taxes.

On Monday, Bloomberg’s Nancy Cook reported that the Biden administration is “determined” to increase taxes in order to pay for the latest $1.9 trillion COVID-19 relief package. The New York Times also reported that the White House is targeting $3 trillion worth of spending, potentially over multiple pieces of legislation targeting infrastructure, clean energy, and universal pre-K among other measures. We’re talking about nearly $5 trillion dollars worth of spending. That’s gotta come out of somebody’s pockets, right?

Naturally, while we wait on the details of any formal proposals Wall Street analysts have wasted no time exploring what the impacts of a higher corporate tax rate could have on earnings. And at the high end, this hit could amount to nearly 10% of corporate profits in 2022, according to said Goldman Sachs’ equity strategy team led by David Kostin.

“Our economists expect the next [fiscal] package will be paid for in part by higher tax rates, including on corporate earnings. The tax plan proposed by President Biden in his election campaign would raise the statutory corporate tax rate on domestic income from 21% to 28%, partially reversing the cut from a rate of 35% passed in the 2017 Tax Cuts and Jobs Act. The plan would also raise the tax rate on foreign income (also called the “GILTI” tax) and institute a minimum corporate tax rate.”

“We estimate the Biden tax plan would reduce 2022 S&P 500 EPS by about 9%. However, our economists believe Congress will pass a smaller increase. Our current $197 EPS estimate assumes the statutory rate rises to 25%, representing a 3% drag on earnings. A hike to a rate above 25% or the passage of other proposals like the GILTI tax hike would represent downside risk to our estimate.”

Much like with the volatility we’ve seen over the past couple of months sparked by growing fears of inflation, expected the market to react in a similar fashion as investors begin becoming fearful of Biden’s new tax plan. As we draw closer to the Biden administration unveiling an outline for this legislation expect to hear more from investors and the analyst community about how higher taxes on businesses — or wealthy individuals, for that matter — could impact financial markets.

Originally published by Yahoo Finance

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