IT Giants Vulnerable to Biden's Tax Increase Pledge... "Expected Profit Decline Over 10%"

S&P 500 Earnings Expected to Decline 9.2%... IT, Communication Services, and Consumer Discretionary Sectors to Face Greater Impact
Market Rally to Be Tested... "Sector Rotation May Accelerate"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] An analysis has emerged that major U.S. 'IT giants' such as Apple and Amazon are more vulnerable to the tax increase pledges of Joe Biden, the Democratic presidential candidate. If Biden wins the presidential election next month and implements tax hikes such as raising the corporate tax rate, it is expected that the profitability of large IT companies will suffer the greatest impact. These companies have led the rise of the New York Stock Exchange despite the COVID-19 pandemic, leading to forecasts that capital movement within the stock market will accelerate after the tax increase.

On the 4th (local time), the Wall Street Journal (WSJ) cited Bank of America (BOA) Global Research's analysis of Biden's tax rate increase pledge, reporting that the profits of S&P 500 companies are expected to decrease by 9.2%. Biden has pledged to raise the top corporate tax rate from 21% to 28% and double the minimum tax rate on overseas income from the current 10.5% to 21%, among other tax hikes.

In particular, BOA forecasted that companies in the IT, telecommunications services, and discretionary consumer goods sectors will see profit declines of more than 10% due to the tax increase pledge. Last year, the average effective tax rate for all S&P 500 companies was 17.50%, but Alphabet (13.33%), Amazon (16.99%), Apple (15.94%), and Microsoft (10.18%) were below this average. Only Facebook exceeded the average with 25.50%. This indicates that taxes imposed on large IT companies did not significantly affect their performance. Specifically, telecommunications services and discretionary consumer goods companies are expected to be more vulnerable to corporate tax rate increases than S&P 500 companies overall, while IT companies are estimated to be more affected by tax hikes on overseas income. The proportion of U.S. domestic sales for all S&P 500 companies is 60.3%, but for IT companies, it is only 43.5%. Conversely, this means IT companies have a higher dependence on overseas markets.

The profit decline of IT companies is noteworthy because it could impact the stock market. Apple, Microsoft (MS), Google, Facebook, and Amazon have led the rebound of the U.S. stock market after the COVID-19 pandemic. Amazon's stock price has risen 69% this year alone, Apple and MS have increased by 54% and 31% respectively, and Facebook has also risen 27%. Since corporate profits inevitably affect stock prices in the long term, the upward trend of the New York Stock Exchange could be slowed.

WSJ evaluated, "The dominant position of these stocks, which have played a protective role in the market during the pandemic, could be shaken," adding, "It could test how long the stock market can hold up this year."

On Wall Street, there are expectations that tax increases will drive market changes. Morgan Stanley Asset Management stated that as the economy recovers, cyclical stocks are expected to rise, and they have purchased shares in industrials, raw materials, and financial companies. Lisa Shalett, the company's Chief Investment Officer (CIO), said, "(The proposed tax changes) could accelerate sector rotation because they relatively hit dominant companies harder."

Goldman Sachs analyzed that the possibility of momentum shifts in the stock market has increased based on Biden's push to raise capital gains taxes. WSJ reported that many investors believe it is time for undervalued value stocks to revive, supported by economic recovery and COVID-19 vaccine development.

However, it is premature to conclude that technology stocks will necessarily falter if Biden is elected. Realistically, the economic recession continues, and there is also the barrier of Congress. Currently, the Senate majority party is the Republican Party, which has pushed for corporate tax cuts. Moreover, even if tax increases materialize, additional tax revenue could lead to increased fiscal spending, which could stimulate the economy and offset corporate difficulties, WSJ reported.

This content was produced with the assistance of AI translation services.