Biden tax hike plans only a 'minor speedbump' for US stocks: Goldman Sachs

Former VP wants to raise tax rate on capital gains and dividend income to 43%

Democratic presidential nominee Joe Biden’s proposed capital gains tax hike would be a “minor speedbump” for a stock market poised to continue higher, according to Goldman Sachs Group.

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The former vice president has proposed to use a Democratic sweep to raise the top tax rate on capital gains and dividend income to 43% from 24%. Goldman estimates America’s wealthiest households are sitting on about $1 trillion of unrealized gains.

“History shows stock prices fall, equity allocations decline, and momentum underperforms ahead of increases in the capital gains rate,” wrote a team led by David Kostin, chief U.S. equity strategist at Goldman Sachs. “Any potential selling will be short-lived and reversed in subsequent quarters.”

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The chances of a blue wave are better than not with one week to go until Election Day, according to prediction markets. Traders on the betting platform PredictIt are pricing in a 53% chance the Democrats sweep. Superforecaster predicts there is an 85% chance Biden wins the election and a 76% chance the Democrats win both the House and the Senate.

Relative outperformance of high tax stocks versus low tax stocks suggests a 61% probability of a blue wave, according to Goldman. The firm also notes potential beneficiaries of infrastructure spending have also seen recent strength.

Proposed spending put forth by the Biden-Harris campaign would boost 2021 S&P 500 earnings by 13% over the four-year term, the analysts said, helping mitigate the impact of higher taxes.

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Past tax hikes have proven to induce stock-market selling.

America’s wealthiest households unloaded 1% of their equity stakes, worth about $100 billion in current terms, in the three months ahead of the last major tax hike in 2013, Goldman said. However, that weakness was temporary as wealthy investors re-upped their exposure in the following quarters. Similar patterns were observed following the previous two tax increases.

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“Regardless of who wins the election,” stocks will climb about 10% by the middle of next year, Goldman said.