Potential higher taxes make JPMorgan less bullish. Here's what it's telling clients to do

Published Fri, Apr 23 202111:32 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The one-two punch of rising interest rates and higher taxes will make it harder for the bull market to maintain its traction, JPMorgan strategists said Friday. The stock market suffered an intraday swoon on Thursday on reports that President Joe Biden was planning to hike the capital gains tax on the wealthiest Americans. The tax hike would be part of Biden's larger push for infrastructure and social welfare spending and comes along with a proposed corporate tax hike. Interest rates have also risen this year, though the move has cooled in recent weeks. JPMorgan's equity strategist Dubravko Lakos-Bujas said in a note to clients that yields should move higher again and put short-term pressure on the market, with the potential tax hikes looming as a longer-term risk. "While we think the equity and business cycles should remain intact on global reopening and strong earnings recovery, easy equity gains for the broad market are likely behind us. Our bullish conviction is now lower," the firm said in the note. The proposed 28% corporate tax rate could eat away $8 to $9 of the market's earnings per share number, according to JPMorgan, while the capital gains tax hike could force some investors to sell their holdings before the new rate takes effect. "There is also a potential risk from higher capital gains tax if we get indication that it will materialize and go into effect starting next year (vs. retroactive to 2021) causing certain investors to take profits early," the note said. However, the spending component's of Biden's proposal could be a boost for certain infrastructure stocks. The strategists screened for companies that could be winners in the civil engineering, green energy and broadband industry. Industrial giant 3M appeared on both the civil engineering screen and broadband and 5G screen. The stock has performed well this year, jumping nearly 15% year to date. Wall Street is largely cautious on the stock, however. According to FactSet, 60% of analysts have neutral ratings for 3M and the stock is trading right around its average target price. Tech supplier Corning also appeared on the broadband and 5G screen. JPMorgan upgraded the stock to overweight earlier this week, citing a potential revenue jump from a connectivity buildout. On the green energy front, Plug Power and Blink Charging are two potential winners from a renewable energy push, the note said.

U.S. President Joe Biden holds a bi-partisan meeting on the American Jobs Plan at the White House in Washington, U.S., April 19, 2021.

Kevin Lemarque | Reuters

The one-two punch of rising interest rates and higher taxes will make it harder for the bull market to maintain its traction, JPMorgan strategists said Friday.

The stock market suffered an intraday swoon on Thursday on reports that President Joe Biden was planning to hike the capital gains tax on the wealthiest Americans. The tax hike would be part of Biden's larger push for infrastructure and social welfare spending and comes along with a proposed corporate tax hike.

Interest rates have also risen this year, though the move has cooled in recent weeks. JPMorgan's equity strategist Dubravko Lakos-Bujas said in a note to clients that yields should move higher again and put short-term pressure on the market, with the potential tax hikes looming as a longer-term risk.