Wall Street is ignoring the risk of corporate tax hikes
President Joe Biden has made clear that if he gets his way, companies will soon be paying more taxes.
What’s happening: Biden’s $2 trillion infrastructure proposal, called the American Jobs Plan, would increase the corporate income tax rate to 28% from 21%. On Monday, Treasury Secretary Janet Yellen also called for a global minimum corporate tax to stop a “race to the bottom,” wherein multinational firms book profits in countries with the most forgiving tax systems.
“Together, we can use global minimum tax to make sure that the global economy thrives, based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth and prosperity,” Yellen said in a speech to the Chicago Council on Global Affairs.
You’d expect such policy aims to spook stock investors, since higher taxes eat into corporate profits. But Wall Street roared higher on Monday. The Dow and S&P 500 closed at all-time highs.
Strategists say investors are waiting for a better sense of the dynamics shaping the coming tax debate before making decisions about their portfolios. But there’s reason to think some major reassessments may be required.
In years when both corporate and individual taxes were increased, stocks averaged returns of 2.4%, according to Julian Emanuel, chief equity and derivates strategist at BTIG. The following year averaged -0.9%. That’s compared to a long-run annual average of 7.7%.
Last summer, Dave Zion of Zion Research Group ran the numbers on how Biden’s tax could hit corporate profits. He estimated that S&P 500 companies could see a decline in earnings of nearly 10%.
Big picture: We’re still in the early stages of debating tax proposals. But unless negotiations completely break down, higher costs for companies are coming — a fact that has yet to be fully appreciated by markets.
Jeffrey Sacks, head of investment strategy in Europe, the Middle East and Africa for Citi Private Bank and a member of the firm’s Global Investment Committee, told me that investors haven’t reacted strongly because of ambiguity about the details, including the timeline for when higher taxes could take effect.
The United Kingdom, which has announced plans to hike taxes on the country’s biggest companies, is a “leading indicator,” he noted. But the UK government isn’t planning to implement the increases until 2023, after the economic recovery from the pandemic has largely played out.
“We expect much the same in the US,” Sacks said.
Watch this space: The mood could change in the months ahead, as investors pivot from worrying about inflation to fretting about a new tax regime. Goldman Sachs has noted that in 2017, when former President Donald Trump’s tax cuts were being debated, investors were jolted into action just a month before the bill was passed. The impact on US markets was then felt until the middle of 2018.
Credit Suisse execs out as bank takes huge Archegos hit
The collapse last month of US hedge fund Archegos Capital cost Credit Suisse nearly $4.7 billion and two of the bank’s top executives their jobs.
The Swiss bank said Tuesday that it was likely to report a pretax loss of 900 million Swiss francs ($959 million) for the first quarter of this year after taking a charge of 4.4 billion Swiss francs ($4.7 billion) for the failure of Archegos.
Credit Suisse said that Brian Chin, its top investment banker, and chief risk officer Lara Warner would both be leaving the bank. Other members of the executive board will not receive bonuses for the 2020 financial year, and board chairman Urs Rohner will give up 1.5 million Swiss francs ($1.6 million) in compensation.
Thomas Gottstein, who became CEO last year, will remain in his job.
“The significant loss … relating to the failure of a US-based hedge fund is unacceptable,” Gottstein said in a statement. “Serious lessons will be learned. Credit Suisse remains a formidable institution with a rich history.”
Credit Suisse also said it would slash its dividend and suspend share buybacks.
Remember: Archegos imploded in March after it used borrowed money to build massive positions in stocks including media companies ViacomCBS and Discovery. Credit Suisse and Japan’s Nomura were among the major institutions exposed to losses.
It’s not Credit Suisse’s only stumble in recent weeks. Earlier in March, it froze $10 billion in investment funds connected to failed UK supply chain finance firm Greensill Capital, which provided cash advances to companies owed money by customers.
Investor insight: Bank stocks have soared this year thanks to expectations for a robust economic recovery. But not Credit Suisse. The Swiss bank’s stock is off more than 10% in 2021, while competitor UBS has jumped 21%. The KBW Bank Index, which tracks US lenders, has risen roughly 25%.
Is the NFT bubble bursting already?
Non-fungible tokens, or NFTs, have been all the rage. But their popularity may have already peaked.
Prices of NFTs, the digital certificates that have taken the art and collectibles world by storm, have plunged about 70% from their high point in February, my CNN Business colleague Paul R. La Monica reports.
The average price for an NFT on Monday was about $1,256 — down from more than $4,000 in late February, according to market research site NonFungible.com. Data from The Block, another crypto research firm, shows a similar decline.
NFTs have been at the center of an investing and pop culture mania for the past few weeks, leading some to wonder if the frenzy is a market bubble fueled by the wealthy and younger traders flush with stimulus money.
See here: A JPEG file by the digital artist Beeple recently sold for $69 million at Christie’s. NFTs have helped boost the price of sports trading cards, and rock group Kings of Leon released their most recent album as an NFT. The digital tokens were even the subject of a recent “Saturday Night Live” skit.
Is this just a quick pullback, or has the phenomenon run its course? Time will tell — but even Beeple joked with CNN’s Julia Chatterley last month that he could be the biggest winner of a potential NFT bubble.
Up next
The International Monetary Fund’s latest economic outlook goes live at 8:30 a.m. ET.
Coming tomorrow: The Reserve Bank of India unveils its latest interest rate decision, and Carnival reports results
