The firm expects an infrastructure package to be introduced in the coming months that contains at least $2 trillion of spending and up to $4 trillion if health care, education and child care incentives are also included. The spending will be at least partially paid for with corporate and personal tax hikes.
“Equities appear to be pricing optimism around infrastructure spending but little concern about tax hikes,” wrote a team led by David Kostin, chief U.S. equity strategist at Goldman Sachs.
The S&P 500 has rallied 4.18% so far this year through Friday, extending the rally off the March 2020 low to 75%. The gains have been aided by the Federal Reserve’s loose monetary policy and an unprecedented amount of fiscal stimulus.
The Fed, in order to combat the sharpest economic slowdown of the post-World War II era, last year slashed interest rates to near zero and promised to buy an unlimited amount of assets to support the economy. In addition, Congress has rubberstamped almost $6 trillion in COVID-19 relief, including $3,400 in checks to most Americans.
Goldman strategists believe Congress will approve a smaller increase than the one Biden is planning that raises the statutory corporate tax rate to 25% from 21%. Former Donald Trump’s Tax Cuts and Jobs Act lowered the corporate tax rate from 35%, which was among the highest in the world.
The Goldman team says the slimmed-down tax hike would reduce corporate earnings by 3% in 2022. Implementing Biden’s plan, which raises the corporate rate to 28%, would result in a 9% hit to corporate earnings.
Goldman Sachs also believes any corporate tax hike will be accompanied by increased taxes on capital gains and dividends.
Previous capital gains tax increases have corresponded with both a reduction of equity allocations and a pattern of lower prices. As in the past, Goldman expects any similar patterns to be “short-lived.”