Will stocks go down with a Biden win and Democrat clean sweep? 

Joe Biden launched his $700bn economic plan by taking aim at Wall Street, banks, the stock market and shareholder capitalism in general. Based on polling data, the stock market will need to better reflect the chance of a Biden presidency combined with a Democrat clean sweep of the House and Senate.

Biden issued a threat to “end to the era of shareholder capitalism – the idea that the only responsibility a corporation has is to its shareholder”. Biden, whose policies would tend to raise taxes and regulation risk for corporate America, added: “During this crisis, Donald Trump has been almost singularly focused on the stock market, the Dow and the Nasdaq. Not you. Not your families.” 

The argument about taxation is central to the thesis, as explained by Goldman Sachs in a recent note. The bank noted the US used to have one of the most uncompetitive corporate tax regimes in the OECD at 37% vs the average 24%. Donald Trump changed that with Tax Cuts and Jobs Act (TCJA) 2017… 

Under Trump the effective tax rate paid by median S&P 500 company fell by 8 percentage points, from 27% to 19%, which boosted EPS in 2018 by 10%. 

Since 1990, declining effective tax rates have accounted for 200bps of the 400bps increase in net profit margins and 24% of total S&P 500 earnings growth, according to GS.  

But Joe Biden could undo the cuts and lower earnings for the average S&P 500 company. Under his plans statutory federal tax rate on domestic income would go up from 21% to 28%, reversing half of the cut from 35% to 21% instituted by the TCJA, according to the Tax Foundation.

GS notes that a Biden presidency could also result in a doubling of the GILTI tax rate on certain foreign income, a minimum tax rate of 15%, and an additional payroll tax on high earners.  Biden could increase capital gains tax, which could push investors to sell down stock holdings before it is introduced. 

According to GS this would cut the S&P 500 earnings estimate for 2021 by roughly $20 per share, from $170 to $150. So, the average EPS would fall 12% just at the time that earnings need to rise to support valuations. The S&P 500 traded at a forward earnings multiple of about 23x in June – the highest since 2001 

Regulation risk would also rise on the expectation that a Democrat-controlled Congress and White House would impose tighter restrictions on corporate behaviour, such as buybacks, and increase the cost of doing business by raising the minimum wage and employer contributions. Finally, higher taxes on the rich leaves less cash to invest in stocks.