Chances are rising that the blue wave of Democrats will take control over the House and Senate in November. Democratic presidential candidate Joe Biden now has 55% chance of winning the November election, according to online market and political event forecaster PredictIt. Chances are up from 43% a month ago.
His winning means the partial rollback of President Trump’s Tax Cuts and Jobs Act. Notably, President Trump’s tax law lowered the corporate tax rate from 35% to 21%, starting 2018. Analysis by the Tax Foundation reveals that Biden’s plan is to hike the corporate tax rate to 28%. Biden is also proposing to levy a minimum tax rate of 15%, a potentially damaging outcome for some major companies that pay little in taxes. Biden's tax plan points at revenues needed to pay down the huge debt incurred to fight the recession.
The Tax Cuts and Jobs Act of 2017 has lowered the effective tax rate of S&P 500 companies by 8 percentage points to 19% and boosted S&P 500 earnings by 10%, according to Goldman’s Kostin. Now, Goldman Sachs (NYSE:GS) estimates that a reversal would reduce 2021 S&P 500 earnings-per-share forecast by 12%. Credit Suisse (SIX:CSGN) estimates this change in taxes would boost the effective rate by 4% to 5%, and cut $9 off estimated S&P 500 earnings per share.
However, the blue wave may not appear positive for the broader market on the tax-cut front. Yet, some specific corners stand to gain even if such a scenario arises. Against this backdrop, below we highlight a few sector ETFs that are likely to gain/lose amid a blue wave sweep.
Wining Sectors
Alternative Energy
Alternative energy space has always been supported by the Democratic leaders. If Democrats rule the Congress and the White House again, the stocks and ETFs in the space will get a boost. Biden is forming a plan – a Clean Energy Revolution – to address the issue of climate emergency. He sees America becoming a 100% clean energy economy and net-zero emissions no later than 2050. The move could further benefit ETFs like Invesco (NYSE:IVZ) Solar ETF TAN and iShares Global Clean Energy ETF (NYSE:XLE) ICLN.
Consumer Staples
The federal minimum wage has remained at $7.25 an hour since 2009, although some states have higher minimums. House Democrats in July passed the Raise the Wage Act, which would phase it up to $15 by 2025, but the plan was dissolved in the Senate as Republicans argued that higher minimum labor costs may lead to lower hiring of workers.
Whatever the case, Democrats’ demand shows that serious efforts to rev up minimum wage would be in the cards if there is a sweeping victory. This in turn may lead to greater buying power among consumers, which may end up benefiting consumer staples ETFs like Consumer Staples Select Sect. SPDR XLP.
Losing Sectors
Banks
Banks were a key beneficiary in the lower-tax environment. Big U.S. banks have enjoyed an average 13% increase to earnings per share from the lower rate, per Goldman Sachs. Banks also enjoyed easing of regulatory stringencies in recent years. Moreover, the tax hike may also cause a volatile market and a decline in long-term interest rates due to safe-haven trades. This would further shrink net margins and lower banks’ profits. SPDR S&P Regional Banking (NYSE:KRE) ETF KRE should be watched closely in the coming months.
Healthcare
Healthcare services was also one of the most-taxed industries before. According to MUFG Securities, tax reform probably has boosted managed care companies’ earnings by 30%. In the absence of this, SPDR S&P Health Care Services (NYSE:XHS) ETF XHS could lose ahead.
Reuters noted that domestically geared healthcare companies that were also winners of the tax reform may now feel the pressure. Invesco S&P SmallCap Health Care Portfolio PSCH) could thus be a loser. Moreover, pharma stocks have long been accused of price-gouging by some democrat leaders.
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Consumer Staples Select Sector SPDR ETF (NYSE:XLP): ETF Research Reports
iShares Global Clean Energy ETF (ICLN): ETF Research Reports
Invesco Solar ETF (TAN): ETF Research Reports
Invesco SP SmallCap Health Care ETF (PSCH): ETF Research Reports
SPDR SP Health Care Services ETF (XHS): ETF Research Reports
SPDR SP Regional Banking ETF (KRE): ETF Research Reports
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