Goldman warns of a Democratic sweep, says Biden tax plan could cut S&P 500 earnings by 12%

Published Mon, Jul 13 202012:52 PM EDT

(This story is for CNBC Pro subscribers only.) Goldman Sachs warned about the rising market risk from the upcoming U.S. presidential election, saying the tax proposals that might be enacted under Democratic presidential candidate Joe Biden could take a big bite out of S & P 500 earnings. The bank listed stocks most sensitive to a potential reversal of President Donald Trump's landmark corporate tax cuts. "The 2020 elections add to the earnings uncertainty created by the coronavirus," David Kostin, Goldman's head of U.S. equity strategy, said in a note. "The odds of a Democratic sweep in November have increased substantially since February and now stand above 50%. If enacted, we estimate that the Biden tax plan would reduce our S & P 500 earnings estimate for 2021 by $20 per share, from $170 to $150." The expected earnings decline would be 11.7%. Goldman said this estimate includes raising the statutory federal tax rate on domestic income from 21% to 28%, doubling the tax rate on certain foreign income, adding an additional payroll tax on high earners and imposing a minimum tax rate of 15%. Trump signed the Tax Cuts and Jobs Act in late 2017, which lowered the rate U.S. businesses pay on their income from 35% to 21%. The tax overhaul is seen by many market participants as a key catalyst for the stock market's rally over the last two years. Biden's edge over Trump has widened in recent weeks amid the pandemic and civil unrest. Biden is ahead by 14 points in a major new poll from The New York Times and Siena College , accounting for 50% of the vote compared with Trump's 36%. The most tax-sensitive stocks Companies with the highest effective tax rates benefited the most from Trump's signature tax cuts, and many of these companies face a large risk from a potential rate hike, Goldman said. S & P 500 stocks that received above-average boost from the 2017 corporate tax reform include many industrial companies — Boeing , CSX, Cintas , Union Pacific , J.B. Hunt and United Airlines , Goldman said. Many information technology companies also benefited the most from the tax cuts, including Broadridge Financial, Salesforce, ServiceNow, Visa , F5 Networks and Nvidia . "Investors face not only uncertainty regarding the specifics of potential tax reform but also four more months of market volatility before the resolution of a close political race that could eliminate the likelihood of tax reform altogether," Kostin said. — CNBC's Michael Bloom contributed reporting.

Democratic nominee for president Joe Biden gives a speech to workers after touring McGregor Industries in Dunmore, Pennsylvania on July 9, 2020.

Timothy A. Clary | AFP | Getty Images

(This story is for CNBC Pro subscribers only.)

Goldman Sachs warned about the rising market risk from the upcoming U.S. presidential election, saying the tax proposals that might be enacted under Democratic presidential candidate Joe Biden could take a big bite out of S&P 500 earnings.

The bank listed stocks most sensitive to a potential reversal of President Donald Trump's landmark corporate tax cuts.