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Elections Fears? At Least Taxes Can Be Quantified, Goldman Says

Felice Maranz

(Bloomberg) -- There are a lot of unknowns surrounding the 2020 U.S. presidential election. The effect of possible changes in tax law isn’t one of them, according to Goldman Sachs.

“The impact of corporate tax rates on S&P 500 earnings can be quantified,” strategist David Kostin and others wrote in a note listing candidates who’ve proposed rolling back the 2017 corporate tax cut, including Elizabeth Warren, Bernie Sanders, Pete Buttigieg and Joe Biden.

Effective tax rates dropping for the median S&P 500 company to 19% in 2018 from 27% in 2017 translated into $13 of earnings per share for the S&P 500, they said. Since every percentage point increase in effective tax rates would mean a roughly 1% decrease in S&P 500 earnings per share, raising rates back to 26% from 18% would slash Goldman’s 2021 S&P 500 profits estimate by $21, to $164 -- if legislation were to apply retroactively to the start of 2021.

That includes an $18 reduction directly from a higher tax rate and $3 from reversing the firm’s calculations for how much lower taxes had helped U.S. GDP growth in 2018.

Worries may be further eased with another observation Goldman made: “Investors should discount the likelihood that policies can actually be adopted,” Kostin said. “Recent history has shown that U.S. equities react more to policy implementation than election outcomes,” he added, noting that prediction markets now imply “a 20% probability of Democratic sweep and a 10% likelihood of a Republican sweep.”

Even so, Kostin said that “few pockets of the equity market appear to be reflecting substantial policy risk.” He flagged a few industries:

Health care stocks, as they’ve “demonstrated a strong negative relationship.”Big tech, which has underperformed since July, though a “confluence of factors is likely involved.”Kostin noted both Democrats and Republicans have called for regulatory and antitrust scrutiny of Facebook Inc., Amazon.com Inc. and Alphabet Inc., while August saw a “rotation out of growth stocks and into value stocks as trade news improved and recession fears eased.”He downgraded communication services to neutral from overweight due to rising regulatory risk.Banks, which are in “an industry that has been the focus of political rhetoric but has not seen that risk reflected in share prices.”He attributed a recent rally to a “combination of better-than-expected earnings results and improved global growth sentiment.”

Based on Goldman’s earnings and valuation “sensitivities,” the current state of the race points to a probability-weighted year-end 2020 S&P 500 level of roughly 3200. The S&P 500 was around 3,063 in Friday trading.

--With assistance from Tatiana Darie.

To contact the reporter on this story: Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jennifer Bissell-Linsk

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