Goldman sees higher taxes as the next big market worry with these stocks particularly vulnerable

Published Mon, Mar 22 202110:35 AM EDTUpdated Mon, Mar 22 202111:08 AM EDT

While the stock market appears to be pricing in a once-in-a-generation infrastructure plan from the Biden administration , it doesn't yet seem concerned about the possibility of significant increase to tax levies to pay for it, according to Goldman Sachs. In a note titled "The Taxman Cometh," Goldman U.S. equity strategist David Kostin warned clients that the tax hikes Biden backed during his presidential campaign on corporate and personal income could curb S & P 500 per-share earnings by 9%. "A looming macro issue is the next round of fiscal legislation, which will include corporate and personal tax hikes," Kostin wrote in a note Friday. "The eventual impact will depend on the specifics; our current 2022 EPS estimate assumes just a 3% drag from taxes," he added. "Equities appear to be pricing infrastructure optimism but little concern about tax risk." That could be why cyclical, economically sensitive sectors like industrials, financials and energy are easily outpacing growth-tilted areas of the market like technology and health care so far this year. Energy stocks, which sank in 2020 as consumers halted travel amid the Covid-19 pandemic, are leading the market in 2021 as economies begin to reopen. S & P 500 energy stocks are up 29.3% year to date compared to 15.5% for financials, 2% for consumer discretionary and a decline of 0.8% for tech. During his campaign, Biden said he would be open to raising the corporate tax rate to 28% in what would amount to a partial rollback of President Donald Trump's landmark 2017 tax cuts. Biden also endorsed increasing the top marginal tax rate to 39.6% and taxing capital gains and dividends at the higher ordinary income tax rate. The proposed hikes would help, if not fully cover, the cost of an ambitious "Build Back Better" infrastructure plan the White House is expected to detail later this spring. But those tax increases could add headwinds for businesses that generate a significant portion of their income overseas. Goldman screened a universe of stocks with businesses that derive at least half of their income abroad, a foreign effective tax rate of less than 15% and consensus 2022 total effective tax rates of no more than 21%. These stocks, Goldman argues, could prove the most vulnerable to tax increases on foreign income or minimum rate hikes. The list included chipmakers Nvidia and Xilinx , tech companies Apple and Adobe and materials companies FMC Corp. and Albemarle . "Increases to the domestic statutory rate would primarily affect companies with high domestic business exposure and effective rates close to the statutory rate, which were the primary beneficiaries of the 2017 tax cuts," Kostin wrote. "In sector terms, this includes Financials, Industrials, and Consumer firms. In contrast, proposals like a minimum tax rate on foreign earnings pose the greatest risk to low-tax 'growth' sectors like Info Tech and Health Care," he added. While the bill is expected to earmark billions for repairs to the nation's deteriorating roads and bridges, it's also expected to include a host of provisions championed by more progressive Democrats. Biden has expressed support for significant investments in climate infrastructure : Electric car charging stations, dramatic expansion of wind and solar power generation and boost fuel economy standards. He has also backed incentives to upgrade housing and commercial buildings to make them more resistant to extreme weather. — CNBC's Michael Bloom contributed reporting.

President Joe Biden delivers remarks on the implementation of the American Rescue Plan in the State Dining Room at the White House in Washington, U.S., March 15, 2021.

Kevin Lemarque | Reuters

In a note titled "The Taxman Cometh," Goldman U.S. equity strategist David Kostin warned clients that the tax hikes Biden backed during his presidential campaign on corporate and personal income could curb S&P 500 per-share earnings by 9%.

"A looming macro issue is the next round of fiscal legislation, which will include corporate and personal tax hikes," Kostin wrote in a note Friday.

"The eventual impact will depend on the specifics; our current 2022 EPS estimate assumes just a 3% drag from taxes," he added. "Equities appear to be pricing infrastructure optimism but little concern about tax risk."