Corporate tax hikes out of Washington could put a dent in the S&P 500‘s earnings growth in 2022, Goldman Sach’s David Kostin told CNBC on Thursday.
The chief US equity strategist said that if the entirety of President Biden’s plan is passed, which includes raising the corporate tax rate to 28% from 21% and cracking down on companies that move profits offshore, the S&P 500 would see earnings growth of about 2% in 2022.
That’s lower than the 22% quarterly profit growth in the first quarter of 2021, and the 6% profit growth in 2020, according to Bloomberg data.
However, Kostin’s team is pricing in that only parts of the plan will pass and taxes may only be increased to about 25%. In that scenario, the S&P 500 could see 9% earnings growth next year.
He added that if the current tax law was applied for 2022, earnings growth would be around 12% in 2022.
“2%, 9%, 12%. Somewhere in that range is likely to be where the earnings growth ends up being for the market in 2022,” Kostin said. “And make no mistake about it, all of the conversations with clients right now are about the prospect for profits in 2022.”
The chief strategist added that it may be too early to trade based on the tax proposals, as specifics around the plan haven’t been sorted out by the legislature.
Goldman has a year end price target of 4,300 for the S&P 500, a roughly 5% gain from current levels.
Stocks leaped to record highs several times throughout the week. JPMorgan sees a handful of reasons even higher levels are in store.
Investors faced a fork in the road earlier this month. New stimulus backed by President Joe Biden and Democrats stands to supercharge the US economic recovery, but more conservative experts raised concerns the package could dangerously lift inflation. Traders largely ignored such fears, but stocks elevated valuations now pose a risk of their own.
Strategists led by Dubravko Lakos-Bujas maintain economic reopening and fresh fiscal support trump all. The team reiterated its S&P 500 target of 4,400 on Friday, implying a roughly 12% jump from current levels. The outlook already hinged on a strong consumer recovery, but several new factors bolstered the bank’s call.
Here are the seven reasons JPMorgan sees spending bouncing back and aiding the stock market’s rally.
(1) Swift reopening
Tumbling COVID-19 case counts and continued vaccine rollouts place the US economy mere months away from reopening much of its economy, JPMorgan said. The strategists expect the pandemic to “effectively” end over the next 40 to 70 days.
(2) New stimulus
Roughly $30 trillion in stimulus has aided the global economy through the pandemic, and Democrats are charging on with efforts to approve another $1.9 trillion package. That deal can further accelerate the rebound, particularly by prioritizing employment, JPMorgan said.
(3) Pent-up savings
US households are sitting on record cash reserves with savings totaling about $11 trillion, according to the bank. The unwinding of such funds can revive small businesses and spur new hiring.
(4) Ballooning wealth
Markets’ health through the pandemic can further boost Americans’ wealth. JPMorgan estimates rising values across home equity, pensions, and 401k plans will add up to $48 trillion in total net worth.
(5) Healthy household debt levels
Americans will also be coming out of the pandemic with robust balance sheets. The debt service ratio sits at a four-decade low, and delinquency rates for consumer loans are at historically low levels, JPMorgan said.
(6) Improved job market
A falling unemployment rate, growing average work week, and possibly higher minimum wage will all contribute to a healthier labor market, the strategists said.
(7) Millennial bump
A record 5 million millennials will reach the inflection point of seeking homeownership, according to the team. Increased spending from this group will shift more savings into the economy.
Democrats’ upcoming control of the US Senate paves the way for a new fiscal stimulus and healthy stock-market returns throughout 2021, Credit Suisse analysts said Thursday.
The team led by Jonathan Golub lifted its 2021 S&P 500 price target to 4,200 from 4,050 in a note to clients, implying a roughly 10% rally from current levels. The bank expects the index’s earnings-per-share to climb to $175 this year and reach $200 by the end of 2022.
Jon Ossoff and Raphael Warnock’s victories in Georgia Senate runoff elections bring Democrats’ seat count in the legislative body to 50, meaning any ties will be broken by Vice President-elect Kamala Harris. The shift in power gives Democrats unified control of the government for the first time since 2011 and gives Biden a far easier path for passing progressive policy.
Fresh fiscal support is likely among the President-elect’s first initiatives when he takes office later this month, Credit Suisse said. Democrats are poised to push for another round of direct payments, an extension to unemployment benefits, state and local government aid, and relief for healthcare workers.
A stronger stimulus response, when combined with a swift reopening, can accelerate the country’s economic rebound, the team of analysts said.
“While the timeline for vaccination rollouts has proven underwhelming, the likely avalanche of pent-up consumer demand cannot be ignored. Any additional stimulus will further fan these flames,” they added.
The bank upgraded several cyclical sectors to “overweight” from “market weight,” including industrials, materials, and consumer discretionary stocks. The groups are among those best positioned to benefit from the start of a new economic expansion and a return to pre-pandemic levels of activity, according to the bank.
The team downgraded the tech, consumer services, and internet retail sectors to “market weight” from “overweight.” Health care and financial stocks remain the bank’s “highest conviction overweights.”
Several other Wall Street giants similarly upgraded their outlooks for stocks and the US economy following Georgia’s elections. Bank of America economists said Wednesday that another $1 trillion in stimulus can “easily” boost US economic growth by one point to 6% in 2021.
Goldman Sachs lifted its 2021 growth estimate to 6.4% from 5.9% on Thursday, citing its expectation for a $750 stimulus package being passed in the first quarter.
Now read more markets coverage from Markets Insider and Business Insider:
Byron Wien is forecasting the S&P 500 will tumble almost 20% in the first half of 2021 but then climb to 4,500, a 21% upside from current levels.
The vice chairman of Blackstone Group Inc’s private wealth solutions business released his 36th annual “Ten Surprises” list on Monday. Joe Zidle, the group’s chief investment strategist, co-authored the list.
Wien defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which he believes will have a better than 50% chance of happening.
On the markets front, Wien predicts that the S&P 500 will correct almost 20% in the first half of 2021, but rise to 4,500 later in the year. At the start of 2020, he predicted the benchmark index would pass 3,500 at some point.
Stocks beyond health care and technology will participate in the rise in prices as the stock market broadens out, he added. Wien sees cyclical stocks leading defensive stocks and small-cap stocks beating large-cap stocks. He added that large cap technology stocks will be laggards for the year.
The investor also predicts the post-vaccine economy will be strong and momentum will develop on the back of pent-up demand, while stocks in depressed industries like hospitality and airlines will rally. The unemployment rate will fall to 5% and 2021 will mark the beginning of the “longest economic cycle in history, surpassing the cycle that lasted from 2010 to 2020.”
Wien added that inflation will increase modestly, and as a result, gold will rally and cryptocurrencies will “gain more respect during the year.”