Biden, who earlier last year signed into law a 1% tax on the purchase of corporate shares, is expected to use his speech to call for it to be quadrupled, as well as renewing his calls for higher taxes on billionaires, the White House said on Monday. .
While investors said that the chances of such a proposal passing in Congress – where Republicans control the House of Representatives – were low, it could have some effect on investor behavior.
While there is still a gap between the talk and the actual laws, if companies feel that such a tax is imminent, it may encourage them to speed up buybacks and eventually switch to paying dividends instead.
“We could see an acceleration and that could boost earnings and equity prices this year, maybe,” said Jack Ablin, co-founder and chief investment officer of Cresset Capital. “If this tax encourages companies to raise their dividends instead of buying back shares, all in all, it’s not a bad thing.”
The address comes at a time when the S&P 500, which had risen 6.2% in January, ended up under some pressure as investors weighed encouraging words from the US Federal Reserve about some progress in controlling the -inflation against a robust labor market that hints at a longer period. of policy tightening.
Other topics will be followed by investors, particularly remarks about China, a major area of interest for investors.
Given the recent shooting down of a suspected Chinese spy balloon off the coast of South Carolina by the US military, investors will be watching to see how forcefully Biden addresses relations between the United States and China.
“We expect Biden to address the recent issue related to the Chinese spy bubble and articulate whether or not a response from the United States could further strain relations with China,” said Leo Harmon, chief investment officer of the equity management team at Mesirow, who said geopolitical risks could weigh more heavily on market sentiment over the medium term.
Evercore ISI strategist Julian Emanuel expects that Biden’s words about China will likely underpin volatility and dampen “speculative spirits,” he said.
Biden’s words on the $31.4 trillion debt limit will also be of interest to investors. Biden will insist in his address that raising the debt limit is non-negotiable and should not be used as a “bargaining chip” by US lawmakers, his chief economic adviser Brian Deese said on -Monday.
SHOPPING AND MILLIONAIRES
Corporate share buybacks, where public companies buy back their own shares, thereby reducing the share price, as a way to return cash to shareholders, have grabbed the headlines this week. the year. Buybacks are on pace for a stronger start to 2023 than a year ago in terms of dollar value – although fewer companies are announcing them.
While companies have been criticized for spending heavily on buybacks at the cost of underinvesting in innovation, share buybacks have been a contributor to stock market gains in these -last years.
Even if the tax is increased, the ultimate impact may be relatively small, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Silverblatt estimates that the existing 1% tax will shave just 0.5% off S&P 500 returns in 2023.
Stock buybacks of S&P 500 companies are expected to total $220 billion for the fourth quarter of 2022, with 2023 set to be the first fiscal year with more than $1 trillion in buybacks, according to data from S&P Dow Jones Indices.
If the tax were to rise to a levy of 2.5% to 2.75%, it could start moving money from buybacks to dividends, but not dollar for dollar, Silverblatt said.
Biden is also expected to call for another narrow tax increase: a “billionaire minimum tax” aimed at taxing unrealized capital gains from assets such as stocks, bonds, or privately held companies of high net worth individuals.
But that proposal would be a very complicated new tax regime, creating difficulty for an already overwhelmed Internal Revenue Service and complexity for taxpayers, according to the nonpartisan Tax Foundation.
Still, analysts were skeptical that this would happen either.
“The tax proposals are dead on arrival as Congress is divided, so it’s more of a political talking point for the next campaign as the 1% tax was in the past,” said Ulf Lindahl, chief executive of Currency Research Associates.
(Reporting by Saqib Iqbal Ahmed and Laura Matthews; Editing by Megan Davies and Jonathan Oatis)
By Saqib Iqbal Ahmed and Laura Matthews
