Biden tax raises greater threat to stock market than slowing economy: Goldman Sachs

President Biden’s ability to win further tax hikes will dictate the future of the stock market, according to Goldman Sachs.

The company estimates that increasing the domestic statutory tax rate to 25% and moving about half of the proposed increase in tax rates to foreign income will reduce S&P 500 profits by 5%. Goldman’s 2022 S&P 500 profit forecast is $ 212, 3% below the consensus of $ 220.

Goldman sees the S&P 500 ending 2021 at 4,700, or 5.41% above the index close on Friday. The firm says the S&P 500 will rise another 4.26% next year to 4,900.

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“Taxation, not economic growth, is the main risk to stocks,” wrote a team led by David Kostin, chief US equity strategist at Goldman Sachs, adding that changes to the tax code “would affect corporate profits “next year.

Over the weekend, House Democrats cut their tax hike proposals after Sen. Joe Manchin, DW.Va., said he opposed the $ 3.5 trillion spending program by Biden.

The updated draft proposal, which could still change, would include an increase in taxes for people earning more than $ 400,000 a year and married couples jointly filing at least $ 450,000 a year. Other potential changes include increasing the top corporate tax rate from 21% to 26.5% and increasing the capital gains rate from 20% to 25%.

The corporate tax rate changes pose a greater threat to the stock market than recent growth concerns emanating from Wall Street banks, the company said.

Goldman Sachs and a number of other investment firms have lowered their growth forecasts for the U.S. economy for the remainder of the year in recent weeks amid concerns over slashing fiscal stimulus and spending. consumption, and a resurgence of COVID-19 infections.

Goldman economists last week cut their fourth-quarter growth forecast to 5.5% from 6.5%. A few weeks earlier, the company had reduced its forecast for the third quarter to 5.5% from 9%.

Morgan Stanley’s Ellen Zentner, meanwhile, lowered her growth outlook for the third quarter to 2.9% from 6.5%.

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But Goldman says a proposed tax on company buyouts “could affect supply and demand for stocks” because US companies have been the biggest buyer of US stocks over the past decade.

“In an uncertain economic and fiscal environment, stocks with stable earnings and strong balance sheets should continue to outperform,” Kostin wrote.