U.S. President Joe Biden put taxes and corporate stock buybacks squarely in investors’ focus during Tuesday night’s State of the Union address as part of his push to restructure the world’s largest economy to be less favorable to the very wealthy.
Biden, who earlier last year signed into law a 1% tax on corporate stock buybacks, used his speech to call for that to be quadrupled, as well as renew his calls for higher taxes on billionaires.
Investors said that while the chances of such a proposal passing in Congress – where Republicans control the House of Representatives – were low, it could have some bearing on investor behavior.
If companies sense such a tax is imminent, it might spur them to speed up buybacks and eventually shift toward paying dividends instead.
“We could see an acceleration and that could boost earnings and equity prices this year, perhaps,” said Jack Ablin, co-founder and chief investment officer at Cresset Capital, ahead of the speech. “If this tax encourages companies to raise their dividends instead of buying back shares, all in all, it’s not a bad thing.”
The address comes at a time when the S&P 500 (.SPX), which had rallied 6.2% in January, has come under some pressure as investors weigh the U.S. Federal Reserve’s encouraging words on some progress on controlling inflation against a robust labor market that hints at a longer period of policy tightening.
In an indication of the challenges Biden faces in implementing his wish list in a divided Congress, U.S. stock futures barely moved after the speech.
Biden’s words on the $31.4 trillion debt ceiling were also of interest to investors. The White House has said Biden will not negotiate over the need to lift that ceiling, while Republicans want spending cuts in exchange for their support.
“Some of my Republican friends want to take the economy hostage – I get it – unless I agree to their economic plans,” Biden said.
Damien Boey, chief macro strategist at Barrenjoey in Sydney, said overcoming that gridlock in Congress was critical as the government gets closer to hitting the debt ceiling.
“Obviously Biden is clearly pitching to the Republicans is that they want to work together. Most people anticipate that is not going to be an easy promise as you get there.”
Other topics were also watched by investors, particularly remarks on China, a key area of interest for investors.
Given the recent shooting down of a suspected Chinese spy balloon off the coast of South Carolina by the U.S. military, investors were looking to see how forcefully Biden addressed U.S.-China relations.
Biden said that if China threatened U.S. sovereignty, the U.S. would act to protect the country.
“I expected some more hawkish comments on China,” said Naka Matsuzawa, chief strategist at Nomura in Tokyo. “Biden should be clearer about how they are going to develop the supply chain away from China. Trade with China is still increasing, rather than decreasing, at this moment.”
Corporate stock buybacks, where public companies buy back their own shares, thereby juicing the price of the shares as a way to return cash to shareholders, have grabbed headlines this year.
Even if the tax goes up, the ultimate impact may be relatively small, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Silverblatt estimates the existing 1% tax will shave off only 0.5% from S&P 500 earnings in 2023.
S&P 500 companies’ stock buybacks are expected to total $220 billion for the fourth quarter of 2022, with 2023 set to be the first fiscal year with over $1 trillion in buybacks, according to data from S&P Dow Jones Indices.
If the tax were to go up to a 2.5% to 2.75% levy, it could start to move money from buybacks to dividends, but not dollar for dollar, Silverblatt said.
Biden was especially critical of oil companies’ profits. “I think it’s outrageous,” he said, while noting the United States would need oil for at least another decade.
Biden also called for another narrow tax increase: a “billionaire minimum tax” aimed at taxing the unrealized capital gains from assets such as stocks, bonds, or privately held companies of high networth individuals.
That proposal would be a highly complicated new tax regime, creating difficulty for a currently overwhelmed Internal Revenue Service and complexity for taxpayers, according to the nonpartisan Tax Foundation.
Still, analysts were skeptical of this also coming to fruition.
“The tax proposals are dead on arrival since Congress is divided, so it is more of a political talking point for the upcoming campaign just as tax the 1% has been in the past,” said Ulf Lindahl, chief executive at Currency Research Associates.