Category: David Kostin

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Higher taxes, not a slowing economy, are the biggest risk to stocks going forward and will erode profit growth, Goldman says

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Tax reform is the key risk to US stocks through the end of the year, not a slowing economy, according to Goldman Sachs.

As a number of firms – including Goldman Sachs – downgrade GDP growth forecasts for the rest of 2021, concerns about what the softer growth outlook means for stocks have come to the top of investor minds, noted a team of strategists led by David Kostin.

But the price action within the stock market for the last several months reflects the weakening environment, the strategists said. However, “the market appears to be only partially pricing an increased tax rate in 2022,” the note reads.

Goldman Sachs estimates that a scaled-down version of the tax plan proposed by President Biden will pass into law. If the government hikes the domestic statutory corporate tax rate to 25% and increase taxes on foreign income, that would reduce S&P 500 earnings by 5%, according to Kostin’s team.

On Monday, House Democrats proposed a plan to lift the top corporate tax rate to 26.5%, below Biden’s proposed 28% rate.

“As a result of incorporating tax reform into our model, our 2022 EPS forecast is 3% below the bottom-up consensus estimate of $220, which embeds an effective tax rate of 19%, compared with a realized effective rate of 18% since the 2017 tax cuts,” they added.

Goldman Sachs said stocks with stable earnings and strong balance sheets should continue to outperform in the uncertain economic and tax policy environment.

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US households will push $350 billion into stocks this year as faster economic growth lifts demand, Goldman says

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  • Goldman Sachs lifted its forecast for 2021 US household equity demand to $350 billion from $100 billion.
  • The new level accounts for stronger economic growth and sets households up to be the largest source of stock market demand this year.
  • Corporations are set to buy $300 billion in stock as repurchase activity rebounds, the bank added.
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US households’ demand for stocks is set to rebound alongside the broad economy and even exceed corporate buying in 2021, Goldman Sachs strategists said.

Equities continue to endure volatile price swings as rising Treasury yields cut into their appeal. Pricey tech stocks and growth names have plummeted as investors shift cash to sectors most likely to benefit from a full reopening. 

The choppy price action isn’t likely to keep Americans from the market, Goldman said in a note to clients. The bank lifted its estimate for 2021 household equity demand to $350 billion from $100 billion. The new projection sets households up to be the largest source of stock-market demand this year.

The updated forecast reflects “faster economic growth and higher interest rates than we had assumed previously, additional stimulus payments to individuals, and increased retail activity in early 2021,” the team led by David Kostin said Friday. Accelerating economic growth has been the single most important driver of households’ equity purchases over the past three decades, the team added.

Corporate equity demand will also bounce back from 2020 levels. Roughly $126 billion in stock buybacks have been approved year-to-date, up 50% from levels seen at the same time last year, Goldman said. Surging profits and elevated cash balances should also prop up repurchase activity. The bank sees corporations buying $300 billion in stock through the year, up 100% from last year’s levels but 25% below the annual average seen from 2010 to 2019.

Precedent suggests the market’s wild moves precede healthy gains, the bank said. Periods of rising real rates and breakeven inflation have been the most favorable for stocks over the past 10 years. Investors’ equity allocations usually grow when interest rates tick higher, the strategists added.

To be sure, Goldman’s Sentiment Indicator currently sits two standard deviations above average, implying “extremely stretched” positioning in stocks. Such crowding will serve as a headwind to market gains, the team said. But accelerating growth should still drive the S&P 500 higher over the next two months at least, they added.

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