- Goldman Sachs sees an increased possibility of a “blue wave” in the November elections, which could impact corporate profits and dividends.
- That could lead to a partial or full reversal of the Tax Cuts and Jobs Act corporate tax reform legislation.
- “We estimate that a full reversal would lift the effective S&P 500 tax rate from 18% back to 26% and reduce our 2021 EPS forecast of $170 by $20 (11%) to $150,” Goldman vice president of equity strategy Cole Hunter and chief US strategist David Kostin wrote in a Thursday note.
Goldman Sachs said the possibility of a “blue wave,” or round of Democratic victories, is increasing ahead of the November 2020 elections.
“The 2020 election is just five months away, and prediction markets now price a 77%, 50%, and 51% likelihood of Democratic victories in the House, Senate, and presidential races, respectively,” Goldman vice president of equity strategy Cole Hunter and chief US strategist David Kostin wrote in a Thursday note.
According to Goldman, that could lead to a partial or full reversal of the 2017 Tax Cuts and Jobs Act, sweeping corporate tax reform legislation. Rolling the legislation back or dashing it entirely would have a negative impact on the earnings and dividends of companies, Goldman said.
“We estimate that a full reversal would lift the effective S&P 500 tax rate from 18% back to 26% and reduce our 2021 EPS forecast of $170 by $20 (11%) to $150,” Hunter and Kostin wrote.
The increasing odds of a Democratic “blue wave” in November have also raised the chances of a corporate tax hike, according to a Goldman Sachs report.
“The 2020 election is just five months away, and prediction markets now price a 77%, 50%, and 51% likelihood of Democratic victories in the House, Senate, and presidential races, respectively,” the report said.
“Our political economists believe that such an outcome could lead to a full or partial reversal of the 2017 Tax Cuts and Jobs Act corporate tax reform legislation.”
Some of the major elements of the act, which was backed by congressional Republicans and the Trump administration, include reducing tax rates for businesses and individuals and reducing the alternative minimum tax for individuals and eliminating it for corporations.
The observation appeared in a study about how long-dated S&P 500 dividends are trading at a discount to the firm’s top-down estimates.
The report noted that the S&P 500 has surged 38% from its March 23 low. While long-dated S&P 500 dividend swaps and futures have historically traded with a high beta to the underlying equity index, the report said, the 2023 S&P 500 dividends per share has risen by only 7% during the period.
High beta stocks are those that are positively correlated with returns of the S&P 500, but at an amplified magnitude.
Fifty-six companies accounting for 8.1% of 2019 S&P 500 dividends per share have cut or suspended their payouts year-to-date as companies reassess their balance sheets in light of uncertainty caused by the coronavirus pandemic.
Airlines, cruise operators, hotels, casinos, retail, and energy companies account for much of the list, the report said, but dividend cuts have been fairly broad-based.
In addition to a possible Democratic victory, the report noted that the equity rally has been narrowly concentrated among firms that pay minimal or dividends.
Also, the recent higher move in equities has been driven by an expansion in P/E multiples rather than earnings growth.
Still, Goldman noted that high-tax-paying equities have actually outperformed their low-tax peers since March – gaining 44% and 38%, respectively. This could imply that investors may not be pricing in the risk of an increase in taxes, according to the note.
This is just one factor that Goldman sees contributing to the underperformance of long-dated dividends, the note said.
Other contributors include that the equity market has been disproportionately driven by valuation expansion as opposed to earnings growth. Also, the market has become increasingly concentrated in big-tech companies such as Facebook, Apple, Amazon, Google, Netflix, and Microsoft.
Meanwhile, a new national poll indicates that President Trump’s approval rating is dropping and that he trails Democratic challenger Joe Biden by double digits if November’s presidential election were held today.
According to a CNN survey released on Monday, the president’s approval rating stands at 38 percent, a dive of 7 percentage points from CNN’s previous poll, which was conducted in early May. And Trump’s disapproval rating jumped from 51 percent month ago to 57 percent now.
And the poll shows the former vice president and presumptive Democratic nominee topping the GOP incumbent in the White House by 14 points — 55 to 41 percent. That’s nearly triple the 5-point margin – 51-46 percent – Biden led by a month ago in CNN polling.
The president, who rarely misses an opportunity to blast a poll that he doesn’t like, took to Twitter soon after the survey’s release to charge that “CNN Polls are as Fake as their Reporting.” CNN Polls are as Fake as their Reporting. Same numbers, and worse, against Crooked Hillary. The Dems would destroy America!, Trump wrote.
The 14-point lead for Biden in the new CNN survey is double the 7-point advantage for the former vice president over Trump in an NBC News/Wall Street Journal poll released on Sunday. An average of the last national general election matchup polls compiled by RealClearPolitics indicates Biden on top by 7.8 percent over the president.
The CNN poll was conducted Tuesday through Friday – which means it questioned voters nearly entirely before Friday’s stunning unemployment report, which indicated 2.5 million jobs were created last month and that the nation’s jobless level had dropped. The numbers were boosted by states reopening their economies after being mostly shut in late March and April in order to limit the spread of the coronavirus pandemic.