In Biden’s speech, investors are focused on buybacks and the billionaire tax
During his State of the Union address on February 7, US President Joe Biden placed taxes and corporate stock buybacks squarely in the spotlight of investors, as part of his push to restructure the world’s largest economy to be less advantageous to the very affluent.
Biden, who signed a 1% tax on corporate stock buybacks into law earlier this year, used his address to push for this to be quadrupled and to reiterate his calls for heavier taxes on billionaires.
Even if the likelihood of such a proposal prevailing in Congress – where Republicans control the House of Representatives – is low, it could influence investor behavior, according to investors.
If corporations anticipate the imposition of such a tax, they may accelerate buybacks and finally switch to dividend payments.
Before delivering the speech, Jack Ablin, co-founder and chief investment officer of Cresset Capital, said, “Acceleration is possible, which could improve earnings and stock prices this year.” If this tax pushes corporations to increase dividends rather than repurchase shares, it is not a bad thing.
The address comes at a time when the S&P 500, which gained 6.2% in January, has come under some pressure as investors evaluate the US Federal Reserve’s reassuring comments on some progress in containing inflation against a healthy labor market, which suggests a lengthier period of policy tightening.
US stock futures scarcely moved after the speech, which is indicative of the difficulties Biden would face in achieving his agenda in a divided Congress.
Investors were especially interested in Biden’s remarks about the $31.4 trillion debt ceiling. The White House has stated that Vice President Biden would not negotiate over the need to raise the debt ceiling, while Republicans are demanding expenditure cutbacks in exchange for their support.
Biden stated, “I understand that some of my Republican friends want to hold the economy hostage unless I agree to their economic proposals.”
As the government approaches the debt ceiling, Damien Boey, chief macro strategist at Barrenjoey in Sydney, emphasized the importance of breaking the congressional stalemate.
Evidently, Biden’s message to the Republicans is that they desire to collaborate. Most people predict that this will not be an easy commitment to keep once you arrive.
Investors were also attentive to other themes, particularly China-related comments, a crucial area of interest for investors.
Given the recent downing of a suspected Chinese spy balloon by the US military off the coast of South Carolina, investors were eager to hear how firmly Vice President Biden addressed US-China ties.
Biden stated that if China endangered US sovereignty, the United States would take action to defend the nation.
Naka Matsuzawa, chief strategist at Nomura in Tokyo, predicted more hawkish statements on China. “Biden should be more explicit about how they plan to extend the supply chain outside of China. Currently, trade with China is still expanding rather than decreasing.”
This year, corporate stock buybacks, in which public firms buy back their own shares, thereby boosting the price of the shares as a means of returning cash to shareholders, have dominated the news.
According to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, the overall impact of a tax increase could be rather minor.
Silverblatt believes that the existing 1% tax will only reduce S&P 500 earnings by 0.5% in 2023.
According to data from S&P Dow Jones Indices, buybacks by S&P 500 corporations are predicted to reach $220 billion in the fourth quarter of 2022, with 2023 being the first fiscal year to surpass $1 trillion in buybacks.
If the tax rate were to increase from 2.5% to 2.75 %, Silverblatt stated that money could begin to shift from buybacks to dividends, but not dollar for dollar.
Biden was notably scathing of the profits of oil firms. “I find that absurd,” he remarked, emphasizing that the United States would continue to require oil for at least a decade.
Additionally, Biden proposed a “billionaire minimum tax” targeted at taxing the unrealized capital gains of high-net-worth individuals from assets such as stocks, bonds, and privately held firms.
According to the neutral Tax Foundation, this idea would entail a highly complex new tax regime, posing difficulties for an already overburdened Internal Revenue Service and introducing complexity for taxpayers.
Nonetheless, analysts were pessimistic that this would also materialize.
“The tax measures are dead on arrival because Congress is divided, so it is more of a political talking issue for the forthcoming election, just as taxing the 1% was in the past,” said Ulf Lindahl, CEO of Currency Research Associates.