Sunday, September 26, 2021

Analysis: Struggle over taxes, debt limit challenge rally in US stocks

NEW YORK—Investors are turning their attention to Washington, as the twin prospects of tax hikes and a potentially protracted battle over raising the debt cap on a rally in US stocks.

Democrats in the US House of Representatives on Monday raised the top tax rate on corporations to 26.5 percent from the current 21 percent and increased income and capital gains tax on individuals earning more than $400,000 as part of a plan to withdraw former President Donald Trump’s signature. proposed. The tax bill was passed in 2017.

Those measures could spell trouble for sectors like technology and healthcare, where many investors are sitting on potential capital gains, while also year-end tax-induced sales as homes attempt to lock in lower capital gains rates. Do, said Margaret Patel, senior portfolio manager at Wells Fargo.

“It has to come out of stock market valuations, there’s no two ways about it,” she said.

If Congress fails to raise the $28.5 trillion debt limit, meanwhile, it could prompt the government to default on its payment obligations.

Most analysts agree that such an outcome is unlikely, but concerns are likely to rise if a deal doesn’t happen soon. US Treasury Secretary Janet Yellen warned earlier this month that the cash and “extraordinary measures” being used to temporarily finance the government would “expire” during October.

The development in Washington could add another challenge to a rally in US stocks that has so far rolled despite concerns over everything from a COVID-19 resurgence to rising inflation, with the S&P 500 gaining nearly 19 percent this year and Brought almost double. from its March 2020 low.

Still, some analysts have begun to include taxation on a company’s earnings in their calculus.

Credit Suisse’s chief U.S. equity strategist Jonathan Golub cited the prospect of higher taxes as a factor in his decision in late August, which reduced its forward price for the S&P 500 from 21.4 to 20%, per earnings per share. Refers to a hit of $10. part of the index for 2022.

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People walk near the New York Stock Exchange (NYSE) on August 9, 2021 in Manhattan, New York City. (Andrew Kelly/Reuters)

Meanwhile, Goldman Sachs on Monday cut its earnings per share for the S&P 500 by 5 percent, based on assumptions that the corporate tax rate would rise to 25 percent, slightly less than the 26.5 percent proposed by House Democrats.

Broadly speaking, a group of Wall Street banks recently warned that there is a pullback in the market, citing concerns over everything from valuations to declining growth.

At the same time, investors are anticipating the odds of a bad debt limit fight.

“This is an underappreciated risk by the market and it is probably one of the big potential volatility catalysts we’re seeing over the next few months,” said Mike Stritch, chief investment officer at BMO Wealth Management.

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Many are mindful of 2011, when the United States lost its top-tier AAA credit rating to Standard & Poor’s on August 5, following a fierce political battle over debt limits, with the S&P 500 rising 17 percent since early July. contributed to the decline. in early August of that year.

The political wrangling in October 2013 that led to the government shutdown also rocked stocks, with the S&P 500 falling nearly 4 percent in a few weeks before bouncing back.

Democrats, who are trying to implement a $3.5 trillion domestic investment plan, have only a slim lead in Congress. The Senate is effectively split 50-50, with Democrats holding a majority due to Vice President Kamala Harris’s tie-breaking vote, while Democrats have 220 seats in the House of Representatives, compared to 212 for Republicans.

“There’s a lot of balls in here over the next several weeks and I don’t think the potential risk in the equity markets is worth the money,” said James Ragan, Director of Wealth Management Research at DA Davidson.

by David Randall and Louise Kraskoff

Reuters

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This News Originally From – The Epoch Times

Analysis: Struggle over taxes, debt limit challenge rally in US stocks
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