Breaking News
0

U.S. tax bill may drag on earnings, cause buyback rush; gives some sectors a boost

Stock Markets Aug 08, 2022 14:30
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: Raindrops hang on a sign for Wall Street outside the New York Stock Exchange in Manhattan in New York City, New York, U.S., October 26, 2020. REUTERS/Mike Segar/File Photo
 
US500
+2.43%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
SPX
+2.43%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

NEW YORK (Reuters) -The climate, healthcare and tax bill passed by the U.S. Senate over the weekend could shave corporate earnings slightly and make companies pull forward their share repurchase plans, while giving a boost to some sectors like electric vehicle makers, biofuel and solar energy.

The $430 billion Inflation Reduction Act bill would impose a new excise tax on stock buybacks and a minimum 15% tax on corporations. The bill now heads to the Democratic-controlled House of Representatives, which is expected to pass it on Friday. It will then be signed into law by President Joe Biden. The tax changes would be effective from next year.

The two taxes are estimated to lower 2023 earnings per share of S&P 500 companies by roughly 1.5%, according to a research note by Goldman Sachs (NYSE:GS), which said that larger declines would be expected in low effective tax rate sectors such as healthcare and IT.

UBS's chief investment officer for the Americas, Solita Marcelli, similarly estimated the proposed new taxes would have "a very minimal 1% drag on S&P 500 earnings per share, although some companies will be more affected than others."

Some investors predicted a corporate buyback rush.

"The number one thing that stands out is that you're going to see an acceleration of buybacks before the end of this year," said Thomas Hayes, chairman and managing member of New York-based Great Hill Capital. "Companies would rather not pay that tax ... They have this window, and you can be assured they're going to take advantage of it."

Buybacks hit a record $281.0 billion in the first quarter of 2022, according to S&P analyst Howard Silverblatt, although they fell 17.4% in the second quarter.

Any rush to get buyback done this year could offer the market some more support as it rebounds from its mid-June lows, said Tim Ghriskey, senior portfolio strategist Ingalls & Snyder.

The S&P 500, about flat on Monday, has risen about 13% since hitting a year-and-a-half low in mid-June.

In the longer term, the 1% tax is unlikely to inhibit corporate buybacks, S&P's Silverblatt said.

Jaret Seiberg at Cowen Washington Research Group likewise said it was hard "to see companies changing their behavior" in response to the 1% tax. There is a risk, though, that taxing dividends becomes an "easy way to raise additional money" and that Congress raises the 1% in future, he added.

Meanwhile, higher corporate taxes also run the risk of squeezing corporate profit margins, John Petrides, portfolio manager at Tocqueville Asset Management, said.

"Higher taxes will reduce incentive to hire and could lead to more CapEx (Capital Expenditure) being spent on automation," Petrides said.

Some sectors, meanwhile, got a boost on Monday, with shares of U.S. automakers including Tesla (NASDAQ:TSLA) Inc, Rivian Automotive Inc, Ford Motor (NYSE:F) Co, General Motors Co (NYSE:GM) and Lordstown Motors Corp rising between 3% and 6% in afternoon trade.

The bill creates a $4,000 tax credit for used electric vehicles and provides billions in funding for EV production.

    "Some of the subsidies and incentives for EVs will be helpful and will help Ford and GM and Teslas of the world to get more orders," said Hayes. He added that the biggest beneficiary will be Tesla.

Biotech and pharma stocks should rebound after some uncertainty because the bill is "less onerous than initially anticipated as it relates to negotiating drug prices," Hayes said.

Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, said the bill is only marginally negative for the healthcare industry.

"It phases in over time and only affects a few drugs, so the devil's in the details," he said.

Shares of biofuel producers, including Darling Ingredients, Neste, Gevo Inc, expected to benefit from the extension of the biofuel blenders tax credit and addition of sustainable aviation fuel tax credits included in the Act, rose on Monday before giving up gains to trade little changed on the day.

Meanwhile, First Solar Inc (NASDAQ:FSLR) shares rose on analyst upgrades in the wake of the Senate passing the bill.

U.S. tax bill may drag on earnings, cause buyback rush; gives some sectors a boost
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email