Biden’s proposed tax plan could cause a 4% hit to the stock market’s most crucial engine, JPMorgan says

• President Joe Biden’s proposal to raise corporate taxes could result in a 4% decline in earnings per share for the S&P 500, according to JPMorgan.
• The bank said the 28% corporate tax proposal would result in a $9 drop in S&P 500 EPS.
• But S&P 500 companies are well-positioned to absorb the potential tax increase for four big reasons, JPMorgan said.
• Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

President Joe Biden’s corporate tax increase proposal could shave 4% off corporate earnings, slowing the most crucial engine of stock-market returns, according to a Friday note from JPMorgan.

Biden has proposed increasing the corporate tax rate to 28% from 21% to help pay for his $2.2 trillion infrastructure proposal. While the tax increase proposal remains up in the air, JPMorgan estimated that if it went into effect, the S&P 500 would see a 4% decline in earnings per share.

The bank estimated that even when including the net benefits of the proposed infrastructure plan, 2022 EPS for the S&P 500 would drop by about $9. The median EPS estimates for the S&P 500 in 2022 is $205.

But JPMorgan also outlined four reasons why S&P 500 companies are well positioned to absorb the potential corporate tax rate increase. A robust economic and earnings recovery, elevated corporate cash balances, a partial offset from net operating losses of $290 billion, and a boost in aggregate demand stemming from increased government spending should help insulate companies from the tax hike.

Yet that’s not the only tax hike that Biden is considering. Reports on Thursday suggested that Biden is set to propose a near doubling of the capital gains tax rate for individuals making more than $1 million. According to JPMorgan, that potential tax hike could also hurt stocks.

“There is also a potential risk from higher capital gains tax if we get indication that it will materialize and go into effect starting next year (vs. retroactive to 2021) causing certain investors to take profits early,” JPMorgan said.

But investors should refrain from making investment decisions on initial tax proposals from the Biden administration, as they can significantly change as negotiations begin.

“Since it is much easier to spend than increase taxes in DC, some are even suggesting little or nothing will get done,” JPMorgan cautioned.

Read more: UBS picks 13 stocks poised to profit for years to come from the return to retail as the economy recovers and consumers start spending again