The world’s largest asset manager is cooling off on US equities in the short term. This is why.

The potential for higher US taxes, coupled with regulatory risks and shifting growth momentum, is dampening our near-term enthusiasm for US equities, Wei Li, global chief investment strategist, and a team at the BlackRock Investment Institute, said in a weekly commentary published. on Tuesday.

The world’s largest asset manager sees stocks in non-US developed markets as better positioned to catch the economic restart over the tactical horizon as the rest of the world recovers from the coronavirus pandemic.

The White House recently signed a bipartisan infrastructure plan, a small part of an original $4 trillion proposal that would be funded in part by higher taxes on corporations and wealthy individuals, the manager noted. That’s because the US is also backing a global minimum tax, long sought after by the Organization for Economic Co-operation and Development, which wants rules on taxing cross-border digital services and multinational corporations trying to shift profits to lower-tax jurisdictions.

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Higher taxes would have diverse sectoral implications, Li and the team said. Sectors with the lowest effective tax rates or the actual rate paid, taking into account various tax benefits and deductions, have the most to lose, all else being equal. Information technology (IT), the largest sector on the S&P 500 index, has a relatively low effective tax rate of just under 17%. Energy, materials and basic consumer goods have tax rates above 20%.

Large-cap information technology and health stocks, which typically benefit most when profits can find lower-tax jurisdictions, could take the biggest blow to profits if a global minimum tax becomes a reality. Tax hikes coming in less than President Joe Biden’s administration has proposed could soften the blow, while the sectors’ relatively high profit margins and supportive structural growth trends would also help offset those risks.

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sees a lot of uncertainty around any tax plan, and says the two-party agreement still faces hurdles, so in the end they expect a spending plan well below the price tag, meaning fewer compensatory tax increases. But if the tax hikes are implemented, Blackrock has an idea of ​​what that could mean for stocks.

If the proposed corporate tax rate of 28% and a global minimum tax rate of 21% were imposed, we estimate that the earnings per share of the S&P 500 index would be 7% lower in 2022 compared to a scenario without tax increases, according to the report. BlackRock.

Turning to non-US equity markets, BlackRock said Europe and Japan are well positioned to take over from a strong US-led economic restart. Those markets already have a lot of taxes and regulations, with little room for more.

BlackRock also still likes small- and mid-cap US stocks, which the strategist said are less likely to be affected by tax hikes and regulations targeting large companies. Any higher taxes on individual capital gains could place greater emphasis on after-tax portfolio construction and stimulate demand for tax-efficient strategies that allow investors to better control the timing of capital gains, such as exchange-traded funds and managed accounts. said.

US Treasuries with tax breaks can also benefit from increased demand, even if their valuations seem relatively high to us, Li and team said.

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