Corporate Tax Hikes Are Coming. What It Means for Investors.

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Washington is about to ratchet up the tax burden on companies, but the stock market doesn’t seem concerned.

The Inflation Reduction Act, which was approved by Congress this past week, imposes a 15% minimum tax for companies with at least $1 billion in average adjusted operating profits in the past three years. It also includes a 1% tax on stock buybacks.

The new minimum rate might sound scary, but it isn’t. According to

Citigroup
,
a slight majority of companies in the

S&P 500
have had a high enough average operating income to pay the 15% tax, but all but about 50 of them are already paying an effective tax rate of 15% or more.

Those 50 companies have recently been contributing about 15% of the S&P 500’s aggregate earnings per share. Taxing them at 15% would shave about 0.4% off the index’s aggregate per share profits,

Citi

estimates.

The buyback tax wouldn’t present much of a burden, either. In 2021, companies in the S&P 500 bought back shares worth about $620 billion more than they issued. A 1% tax on that net buyback would amount to $6.2 billion—or 0.35% of the aggregate $1.76 trillion in earnings that companies in the index produced last year.

After all of the talk in recent years about raising corporate taxes, the new tax policies so far look to be small beans. The market agrees. The S&P 500 closed up 3.3% for the week, helped by a downward tick in July’s consumer price index.

Investors should still be careful. Individual companies, especially select ones in the utilities and technology sectors, could get hit fairly hard.

U.S. Inflation Eases

The consumer price index remained flat in July from a month earlier, thanks to falling energy prices. Inflation decelerated to an 8.5% annual pace. Stocks and bonds rose on the news. The tech-heavy Nasdaq, having staged a recent comeback, entered a new bull market on Wednesday. On Thursday, producer prices fell more than expected in July, suggesting that inflation may have peaked. Stocks were mixed. On the week, the

Dow Jones Industrial Average
rose 2.92%, to 33,761.05; the S&P 500 was up 3.26%, to 4280.15; and the

Nasdaq Composite
gained 3.08%, to 13,047.19.

Last Week

The Earnings Beat

Crypto trading platform

Coinbase Global

had a bigger-than-expected second-quarter loss on depressed digital asset prices;

SoftBank

posted its biggest ever quarterly loss on plunging technology valuations;

Walt Disney

had a 26% jump in revenue, thanks in part to its theme-parks business;

Wynn Resorts

had a mixed quarter, dragged down by ongoing closures in Macau; Wendy’s blamed higher commodity and labor costs for its sales miss.

Biden Signs Chips Law

President Joe Biden signed a $280 billion technology spending bill that includes $52.7 billion to expand chip-making.

Micron Technology

said it would spend $40 billion on U.S. chip-making, creating up to 40,000 jobs through the end of the decade.

Inflation Reduction Act Passes

The House on Friday approved Democrats’ healthcare, climate, and tax package. The Senate passed it on Aug. 7. It now goes to President Biden.

Hedge Fund Oversight

The Securities and Exchange Commission wants to make sure that hedge funds and other private investment advisors aren’t hiding any problems that could shake up the financial system. Regulators are proposing amendments to a confidential reporting form that assesses those risks.

New China Virus

Researchers in China identified 35 people as carrying a novel virus that probably spread from animals to humans. The discovery of the virus—which is unrelated to the coronavirus—comes as the country battles its worst Covid outbreak in weeks. The findings were reported in the New England Journal of Medicine by international researchers….The number of confirmed monkeypox cases continues to climb in the U.S.

Carlyle

CEO Exits

Carlyle CEO Kewsong Lee stepped own, just months before his five-year contract expires. Lee and Carlyle said the decision was mutual but didn’t disclose a specific reason for the early exit. The departure of a second executive, Nathan Urquhart, was announced days later….Elon Musk sold almost eight million shares of

Tesla

worth about $6.9 billion. The CEO’s moves were conducted over three days…Peloton Interactive is cutting nearly 800 jobs, closing stores, and hiking prices as part of a strategic overhaul.

Write to Jacob Sonenshine at [email protected]