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Why investors might not care about the tax hike

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Brian Sozzi and Julie Hyman duke it out on the latest Sozzi’s Take about how the market is reacting to the latest debate on tax hikes and if this debate is actually something investors are worried about happening.

Video Transcript

- Well, Brian Sozzi has a few words today on taxes, which we have been talking about pretty consistently over this-- the past many months here. Sozz, markets aren't-- don't-- aren't really concerned about higher taxes. You think they're wrong.

BRIAN SOZZI: Well, I sense this will morph into a Sozzi-Hyman take nonetheless. So I'll just quickly run through my talking points here for you, Julie. So yes, to your point, I wrote about this on the Yahoo Finance platform right now. The story is out there. Click on it, share, whatever.

The market up to this point can really care less-- really care less about higher taxes. And I would also, of course, add into the fact care less about a Fed taper. Goldman Sachs pointing out in the third quarter so far, the S&P 500 has set new highs on 41% of the trading days. That's pretty good. That is the highest rate since the first quarter of 1998. Shout out to Goldman's David Kostin on that one.

He's also noting it has been about, I believe, 215 trading days now since the S&P 500's last 5% decline. You have to, of course, go back even further to find a 10% decline or that correction everybody's been calling about. That is the ninth longest stretch for the markets in the past 90 years.

Now, up to this point, clearly, you know, just looking at those stats, market does not care about any profit impact next year on potential tax hikes from the Biden administration and other Democrats. But Kostin also really going into, Julie, that there would be a profit impact if these higher tax rates kick in. Kostin is noting if the rates go up as they are suggested now by the Democrats, so a 26% tax rate, you could see S&P 500 earnings next year fall by 5%.

That's why he is-- Kostin-- currently below most analysts' estimates for next year's earnings. So look, there could be a profit impact. Now, those tax rates haven't kicked in, Julie, but it's out there. It lurks. And it could be a hit. And I don't think investors are prepared for that inevitable hit. We're staring right down at this.

- Oh, inevitable, inevitable. Inevitable is a little bit of a strong word.

BRIAN SOZZI: It is inevitable.

- It isn't inevitable. OK, a couple of things here. First of all, there's the point that Chris Harvey made earlier in the hour, which is that this tax rate increase is by no means a certainty and definitely by no means a certainty before the end of the year because it would require some agreement on the hill to get it through.

Be that as it may, let's say 26.5% is the new tax rate for companies that make over $5 million a year. The five-- the hit that we're talking about assumes as well that that will not be more than made up for by an increase in demand. And the increase in demand that we have seen this year far outstrips anything that you would have predicted at this time last year or even earlier this year, so that's another point.

And then further, I would make the point, that, you know, perhaps you're paying more in taxes, but what's the hit that, say, an Amazon is paying right now or a UPS is paying right now every time one of its trucks hits a pothole and has to be repaired. And so part of these taxes, at least in theory, is that they're going to go to pay for infrastructure, stuff that in the long run is not only helpful but necessary for many of these companies.

So that would be the other argument I would make. That is assuming that you would say that-- that, you know, plans like the infrastructure plan and the Build Back Better, et cetera, plan have to be paid for at all, which is a whole other MMT argument that I won't get into at the moment. But be that as it may, I'm not crying for higher taxes for these companies.

BRIAN SOZZI: Well, all great points, Julie, and that's why I prepared the next graphic for us. I think it's very important to show. And this is Sozzi's hot take here, which essentially is that profits will get hit on higher taxes. Stock multiples we'll get hit as-- also, Julie, as Chris Harvey-- you know, he did mention that before to us. Third stock prices will probably get hit. I'll add probably in there. And last but not least, Julie, you love our tax debates and there you see us both smiling-- me in cartoon form, you in your image on the website. But we love our tax chats.

- Yeah, where's my cartoon?

BRIAN SOZZI: [INAUDIBLE] next year as stock prices go down because of higher taxes. Boom.

- My hot take-- where's my cartoon? That's-- that's my takeaway from that.

BRIAN SOZZI: Hey, this is Sozzi's hot take. I'm just, you know, I'm-- I'm rolling with it. I'm rolling with it.

- All right, we'll leave it there, to be continued I am quite sure.