3 Upcoming Policy Shifts That Could Impact The Stock Market

The S&P 500’s bullish momentum in the second half of 2020 has continued in the first half of 2021. The SPDR S&P 500 ETF SPY is up another 13.2% year to date, driven in large part by aggressive stimulus policies out of Washington.

Looking ahead, LPL Research Asset Allocation Strategist Barry Gilbert said policy changes could continue to drive the stock market in coming quarters, but they may flip from a tailwind to headwind.

In a new report this week, Gilbert highlighted three potential federal policy changes investors should be monitoring throughout the remainder of 2021.

1. Stimulus: First, Gilbert said an end to the approximately $5 trillion in direct COVID-19 stimulus spending will mark a clear change for markets moving forward. However, he said investors shouldn’t necessarily be concerned about the market being weaned off of stimulus unless organic economic growth starts to disappoint.

LPL is projecting above-average U.S. economic growth through at least 2022, which should be more than enough to make up for a lack of government stimulus.

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2. Taxes: Second, Gilbert said one of the biggest risks to the bull market is corporate tax hikes.

In December 2017, former President Donald Trump cut the top U.S. corporate tax rate from 35% to 21%, marking the first time since the 1940s the top corporate tax rate had dropped below 30%. President Joe Biden has proposed raising that rate back up to 28%, but Gilbert expects the final rate after negotiations with Republicans will be closer to 25%.

“While we don’t think higher rates would be retroactive, they could take away some of the momentum from recent upside surprises in earnings growth we’ve seen so far in 2021 and contribute to a choppier market,” Gilbert said.

Biden has also proposed raising the top income tax rate from 37% to 39.6% and raising the capital gains tax rate on Americans earning more than $1 million per year from a maximum of 23.8% to 43.4%.

3. Midterms: Finally, Gilbert said long-term investors should keep an eye on how the 2022 midterm election season plays out. While it's still very early at this point, history suggests the party that controls the White House tends to have a difficult time holding onto the House in the midterm elections, and Gilbert said the stock market has historically performed very well under a mixed government.

Benzinga’s Take: Corporate tax hikes are seemingly the most significant potential policy overhang for the stock market. However, LPL’s prediction of around a 25% corporate tax rate seems very manageable considering it still represents a net 10% cut from pre-2018 levels.

Joe Biden. Benzinga file photo by Dustin Blitchok.