As voters prepare for the upcoming election, a key question looms over Wall Street: what will happen to corporate tax rates? While former President Donald Trump’s Tax Cuts and Jobs Act lowered the corporate tax rate from 35% to 21%, Vice President Kamala Harris has proposed raising it to 28% to generate additional revenue.
The pressing concern for investors is whether this increase will lead to a decline in stock prices. Historical trends provide some insights.
Harris’s proposal stems from the need to address significant national deficits, which have persisted since 1970, with the federal deficit nearing $1.7 trillion in 2023. With national debt soaring to around $35 trillion, there is an urgent call for measures to boost revenue, such as Harris’s plan to raise the corporate tax rate, potentially yielding an estimated $4.1 trillion from 2025 to 2034.
On the surface, raising corporate taxes could seem detrimental to businesses by limiting funds for hiring and innovation. However, historical data from Fidelity reveals a different story. The study examined the S&P 500’s performance during past corporate tax hikes in 1950, 1951, 1952, 1968, and 1993, finding positive returns of 22%, 16%, 12%, 8%, and 7%, respectively. On average, the S&P 500 gained 13% in the years following a tax increase, indicating a consistent trend of resilience in the stock market despite higher corporate taxes.
While concerns about a corporate tax hike may be unwarranted, broader market issues remain. Regardless of the election outcome, investors are faced with one of the most expensive stock markets in history. The S&P 500’s Shiller price-to-earnings (P/E) ratio recently hit 36.9, significantly above the long-term average of 17.16, raising flags about overvaluation.
Historically, instances when the Shiller P/E exceeded 30 during bull markets have led to declines ranging from 20% to 89% in major indexes. With only two other periods in the last 153 years witnessing such high valuations, current market conditions warrant caution.
In conclusion, while a corporate tax increase may not necessarily harm stock performance, the prevailing high valuations present a more pressing concern for investors moving forward.
