Some of the policy proposals set out by the Biden administration in recent weeks add weight to the view of strategists at Capital Economics that the S&P 500 will rise more slowly than US nominal GDP in the coming years – in contrast to the pattern of the last decade and much of the period since the 1980s.
Senate Democrats to impose far stricter conditions on mergers
“While tax policy arguably contributed to the S&P 500 rising by more than US nominal GDP in the past few decades, that may reverse if the Biden administration manages to enact its new tax plans. The Biden administration’s Made In America Tax Plan proposes to raise the headline rate of corporate tax from 21% to 28%, which would be the largest increase since the 1950s. It also plans to raise the rate of federal tax paid on long-term capital gains by high income individuals by nearly 20pp. That could weigh on equities.”
“There is a significant chance that antitrust policy becomes more stringent in the next few years, affecting the very largest firms disproportionately. The early signs suggest that antitrust policy could become significantly tougher for the first time in decades under President Biden. Although the Democrats’ majority in the Senate is wafer-thin, antitrust is a rare area of some bipartisan consensus. Several Republican senators have expressed support for tougher regulation. One has proposed legislation containing new curbs on merger activity by big firms that are even stricter than those advocated by the Democrats.”
“The valuation of the S&P 500 is now high by historical standards. We doubt that the price/earnings ratio of the index will continue to climb over the next few years in the way that it has done in recent decades, particularly if we are right that real risk-free yields will gradually increase in the meantime.”
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