Corporate Tax

Company tax hikes imply no destiny for the bull market: Morning Transient

Yahoo Finance’s Myles Udland explains why corporate taxes may not create headwinds for the stock market.

Video transcript

MYLES ABROAD: Brian Sozzi, Sam Roe comes back from vacation and attacks you immediately. He talks about corporate taxes, which are unlikely to be fate for the bull run, and goes through many of the thoughts Wall Street strategists have right now. And what I found interesting, at least in the work Sam cited Sozzi, is that strategists believe that this type of risk is either priced into the market or priced in before we actually pass tax legislation.

BRIAN SOZZI: I can take the hits, Myles. I can take the hits. But yes, [INAUDIBLE]As always, hear a lot of good points in the Morning Brief newsletter. But and we talked a bit about that last week. When the economy picks up again, you will see good sales momentum. You can see that corporate profits are coming back.

And I think the reason you’re seeing stocks continue to hit record highs is because the market may be realizing that the American company can handle higher tax rates, and secondly, maybe the tax rates – the Biden administration proposed that 28% – maybe this will be pushed down – to 25%. He sounds like … he sounded like someone willing to bargain a little, Julie. But again, over time, I’d say that higher taxes aren’t necessarily good for stocks.

JULIE HYMAN: I mean, I don’t think maybe there is anything. It won’t be 28%. There is simply no scenario where this is a realistic scenario and can get away with it. So is it 25%? Is it 24%? Who knows? I mean, if you look at the numbers quoted in the Morning Brief to see what effect this could have, Bank of America, to take just one example, then their base case is that the S&P 500 is in up 32% to 185 this year, which, until 162, I think if I read this correctly, is a result of taxes, but still represents pretty robust growth.

The story goes on

You know, it’s obviously funny the way you say it, Myles, that Sam Roe attacked Brian Sozzi and his attitude towards taxes. I feel of course seen. I feel validated because I got out of it on the other side of it. In fact, it makes most sense to raise taxes during a period of robust growth, as it is the easiest for companies to control. And as we have seen, GDP estimates continue to rise. The earnings estimates continue to rise. The numbers the street is looking for are likely to lead to higher taxes regardless.

MYLES ABROAD: Well, and I think you know Julie, it really brings out … and that’s a great point. It brings together much of the fiscal and monetary policy talks we’ve had. So are you going to run a policy to use procyclical or countercyclical in shaky terms? So try to create the conditions – are you trying to emphasize how the cycle is acting? Or are you trying to counteract this with the political measures you want?

And I think in a situation where the economy is growing, the government is spending more money to keep that growth going. The corollary would be that this is the time when we levy taxes on corporations, on the highest earners. And then in the next downturn, you have the option to counter the downturn by reducing some of those tax burdens on individuals or businesses.

At a time like this when the economy is growing, do you want to raise wages now when there is obviously a tremendous demand for labor out there? I think this will be a big story when we get summer. So these are all the questions that I think are being asked and answered at a higher level by official politics in their own way. And I’d say there’s a lot more pro-cyclicality right now, I think, on the growth side of the equation if we look at some policy targets.

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