By Lewis Krauskopf
NEW YORK (Reuters) – Investors are grappling with the market implications of a potential Kamala Harris administration, which could squeeze corporate profits through higher taxes while also weighing on consumer goods and solar energy stimulus.
Harris’ nomination is a central theme at this week’s Democratic Party convention, after her late entry following President Joe Biden’s withdrawal intensified the race for Republican nominee Donald Trump.
Investors’ views on markets are typically shaped by factors such as the strength of the economy and the path of interest rates. But the question of how a Harris-led White House might approach policy, regulation and taxation is a big one.
“She appears to be on track to be more aggressive than the Biden administration on a lot of consumer issues that go straight to the marketplace,” said Frank Kelly, senior political strategist at investment firm DWS Group, citing Harris’ recent economic proposals and her record as U.S. senator and California attorney general.
On Monday, Harris proposed raising the corporate tax rate from 21% to 28%. Her campaign called the plan a way to “ensure that billionaires and big corporations pay their fair share.”
The plan stands in stark contrast to Trump’s policies, after he cut the corporate tax rate from 35% to 21% as president and sought to make other tax breaks permanent.
According to the nonpartisan Committee for a Responsible Federal Budget, a higher tax rate could reduce the U.S. budget deficit by $1 trillion over the next decade, addressing a problem that has some investors worried.
Higher taxes could also hurt corporate profits. Each percentage change in the statutory domestic corporate tax rate should shift S&P 500 earnings by just under 1%, strategists at Goldman Sachs said.
“Anything that reduces earnings should … have a negative impact on the stock market,” said Peter Tuz, president of Chase Investment Counsel. However, “until you see the proposal, there could be different offsets.”
Many of the proposals from both candidates would require approval from Congress, which is closely divided between Republicans and Democrats. Control of the House and Senate will be at stake on Nov. 5.
Harris’ tax proposal could face major obstacles in a Congress that is divided or under Republican control.
Harris and Trump are locked in a tight presidential race that will likely be decided in a handful of swing states, polls show. Harris has taken the lead in recent weeks
on the PredictIt political betting platform.
FOOD, HEALTHCARE, SOLAR ENERGY STOCKS
Rising expectations that Trump would defeat Biden led to a so-called Trump trade in U.S. stocks last month, with parts of the market benefiting from tax cuts and regulatory easing, including shares of smaller U.S. companies and cryptocurrencies.
Harris last week unveiled a plan to ban overpricing of groceries and groceries, which her campaign says will prevent big corporations from exploiting consumers.
Harris also wants to lower health care costs. Analysts expect she could expand her negotiating powers over prescription drug prices, which were established during the Biden administration.
Lori Calvasina, head of global equity strategy research at RBC Capital Markets, said in a note this week that the proposals could negatively impact stocks in the consumer staples and health care sectors.
Harris also pledged last week to implement a child tax credit, which could lead to “a pretty meaningful boost to consumer spending,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions.
Such spending could be particularly beneficial for retailers and other consumer sectors, he said.
King Lip, chief strategist at BakerAvenue Wealth Management, expects the clean energy initiatives launched under Biden to continue under the Harris administration.
That could provide relief to solar stocks, which have faced headwinds from high U.S. interest rates, Lip said. The Invesco Solar ETF has fallen more than 20% this year.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Rod Nickel)
