By Lewis Krauskopf
NEW YORK (Reuters) – Investors are grappling with the market implications of a potential presidential administration by Kamala Harris, which could pressure corporate profits through higher taxes, while weighing on consumer staples and the push for solar energy.
Harris' nomination is in the spotlight this week at the Democratic convention after her late entry following President Joe Biden's withdrawal tightened the race against Republican nominee Donald Trump.
Investors' views on markets are typically shaped by factors such as the strength of the economy and the path of interest rates, but the question of how a White House under Harris' leadership might approach policy, regulation and taxes looms large.
“She appears to be on track to be more aggressive than the Biden administration on a lot of these consumer issues that go directly to the marketplace,” said Frank Kelly, a senior political strategist at investment firm DWS Group, citing Harris' recent economic proposals and her record as a U.S. senator and California attorney general.
On Monday, Harris proposed raising the corporate tax rate from 21% to 28%, a plan her campaign characterized as a way to “ensure billionaires and large corporations pay their fair share.”
The plan stands in contrast to Trump's record, having cut the corporate tax rate from 35% to 21% as president, and as he seeks to make other tax breaks permanent.
A higher tax rate would help reduce the U.S. budget deficit by $1 trillion over the next decade, according to the nonpartisan Committee for a Responsible Federal Budget, addressing an issue that has worried some investors.
Higher taxes could also hurt corporate profits. Each percentage point change in the national statutory corporate tax rate should change S&P 500 earnings by just under 1%, Goldman Sachs strategists said.
“Anything that reduces earnings should have a negative impact on the stock market,” said Peter Tuz, president of Chase Investment Counsel. However, “until we see the proposal, there may be several trade-offs.”
Many of the proposals from both candidates would require approval by Congress, which is narrowly divided between Republicans and Democrats. Control of the House of Representatives and the Senate will be contested on November 5.
Harris's tax proposal could face serious obstacles in a divided or Republican-controlled Congress.
Harris and Trump are locked in a tight presidential race that will likely be decided in a handful of battleground states, according to polls. In recent weeks, Harris has taken the lead
on the political betting platform PredictIt.
FOOD, HEALTH, SOLAR ENERGY RESERVES
Rising expectations that Trump would beat Biden sparked what is known as the “Trump trade” in U.S. stocks last month, boosting parts of the market seen as beneficiaries of tax cuts and regulatory easing, including shares of smaller U.S. companies and cryptocurrencies.
Last week, Harris outlined a plan to ban price gouging on food and groceries, which her campaign says is aimed at stopping large corporations from exploiting consumers.
Harris is also pushing to lower health care costs, and analysts expect she could expand negotiating powers over prescription drug prices enacted during the Biden administration.
Lori Calvasina, head of global equity strategy research at RBC Capital Markets, said in a note this week that the proposals could weigh on consumer staples and health care stocks.
Harris also pledged last week to introduce a child tax credit, which could provide a “pretty significant boost to consumer spending,” said Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions.
That spending could especially benefit retailers and other consumer-related areas, he said.
King Lip, chief strategist at BakerAvenue Wealth Management, expects clean energy initiatives launched under the Biden administration to continue under the Harris administration.
That could offer relief to solar stocks, which have struggled due to high U.S. interest rates, Lip said. Invesco's solar energy ETF has fallen more than 20% this year.
(Reporting by Lewis Krauskopf; editing by Ira Iosebashvili and Rod Nickel)