Wall Street anticipates a downturn in corporate earnings and stock market performance if US Vice President and Democratic presidential candidate Kamala Harris wins the November election and introduces proposed tax increases. As the November 5 election approaches, tax policy has become a major focus for investors.
The polls show a close race between Republican candidate and former President Donald Trump and Harris, who will debate this Tuesday. Wealth advisers are fielding increased investor queries about the potential for new tax policies.
“Investors are deeply concerned about tax policy,” said Yung-Yu Ma, Chief Investment Officer at BMO US Wealth Management. The firm receives numerous client questions about possible tax hikes. “Tax policy is pivotal in this election.”
Wall Street’s main concerns are corporate earnings and capital gains taxes. Trump lowered the corporate tax rate from 35% to 21% during his term. He also supports reducing it further to 15% for companies manufacturing domestically.
On the other hand, Harris proposed raising the corporate tax rate from 21% to 28% last month. She aims to make large corporations pay more, noting they often pay less than many public servants.
Goldman Sachs analysts have indicated that Harris’s 28% rate could reduce S&P 500 companies’ earnings by 5%. Trump’s proposed cut could boost them by about 4%.
Ma explains that higher taxes could lower corporate profits and stock values. “A significant market downturn could result from increased taxes,” he said.
Tax law changes would need congressional approval. Trump’s campaign criticizes Harris’s plan for a substantial tax hike and its potential to increase the national debt. It has not addressed the fiscal impact of Trump’s tax proposals.
The Harris campaign has not yet responded to these criticisms. Harris’s senior policy advisor, Brian Nelson, stated that Trump’s plan would mainly benefit billionaires and large corporations.
Investor worries include Harris’s proposal to increase capital gains taxes for individuals earning over $1 million to 28%. This is lower than President Joe Biden’s proposed 39.6%. Trump has not suggested any changes from the current 20%.
“Capital gains tax hikes have generally underperformed in revenue generation,” said Brian Gardner, Chief Washington Policy Strategist at Stifel. “Still, they would negatively impact the market significantly.”
Morgan Stanley noted last week that the relationship between capital gains taxes and market performance is not strong. However, the tax debate might cause market volatility in the near term.
A senior bank executive who wished to remain anonymous mentioned that investors are likely to adopt more aggressive tax-minimizing strategies if capital gains taxes rise sharply.
