As the countdown to the November 5 election ticks down, voters will face a crucial decision between current Vice President Kamala Harris and former President Donald Trump for the presidency. Investing and stock market enthusiasts are acutely aware that policies implemented by the incoming administration can deeply influence corporate earnings and, in turn, the stock market’s health.
Harris has sparked considerable discussion on Wall Street with her proposal to elevate the corporate tax rate from 21% to 28%, marking a 33% increase. Given that the U.S. corporate tax is currently at its lowest since 1939, this shift could lead to significant ramifications not only for businesses but also for shareholders.
Higher corporate taxes, while aimed at addressing the long-term federal deficit—now hovering around $35 trillion—could inadvertently hinder economic growth. Many analysts foresee potential drawbacks including slower job creation, decreased acquisitions, and a reduction in funds allocated for innovation and research and development. These activities have historically driven revenue growth, and any slowdown could dent investors’ optimism.
More crucially, a rise in the corporate tax could significantly impact a mechanism that has been pivotal for earnings expansion in recent years: share buybacks. Reduced capital for buybacks may result in diminished earnings per share (EPS), which many investors rely on to assess a company’s performance. As of March 2024, S&P 500 companies executed a whopping $816.5 billion in buybacks—figures that directly accentuate earnings growth. Take Apple, for instance, which has repurchased about $700 billion of its stock since 2013. Without such aggressive buyback strategies, the tech behemoth’s 2024 EPS could have been substantially lower, making its stock less appealing.
Historically, stock buybacks have proven beneficial for companies with stable or rising net income. The practice reduces the number of shares outstanding, thereby increasing EPS—an attractive proposition for investors seeking growth. However, should Harris secure a favorable democratic majority and enact her tax plan, the landscape could shift.
Adding a layer of complexity, a Fidelity study suggests that past corporate tax hikes have often preceded a rise in the S&P 500 by an average of 13%. While this historical trend doesn’t provide a foolproof guarantee of stock appreciation, it indicates that quick corrections in market behavior can be nuanced.
Investors are also grappling with a major concern: the inherent valuation of stocks today. With the S&P 500’s Shiller price-to-earnings (P/E) ratio currently standing at 36.6—almost double its historical average—there are growing fears that the market could be primed for a significant correction. A P/E this high is not typical and has historically preceded substantial declines in market indices.
Despite the market’s potential vulnerabilities due to the heightened tax rate, it’s crucial to underscore that the highest immediate threat seems rooted in the lofty valuations of stocks rather than the policies of an incoming president.
Investment decisions should be underpinned by careful analysis, particularly in such uncertain times. For every dollar put into the S&P 500, investors are urged to weigh the implications not just of potential changes in corporate taxes but also how overvaluation might shape market conditions moving forward.
With a mix of evolving economic policies, market valuations, and investor sentiment, the 2024 election could serve as a pivotal moment for both the economy and stock market, making it essential for investors to stay informed and agile. It’s a space to watch as we approach voting day and beyond, with significant implications for America’s financial landscape.