Stock market investors don't seem to care about higher taxes — but maybe they should

·Anchor, Editor-at-Large
·2 min read

The threat of higher taxes in 2022 and their impact on the bottom lines of companies — and potentially the stock market — has returned to center stage after a summertime slumber. 

But by and large, investors don't appear to either care or don't realize the risks to companies associated with higher taxes. 

"The market appears to be only partially pricing an increased tax rate in 2022," said Goldman Sachs chief U.S. equities strategist David Kostin in a research note on Monday. "Prediction markets currently indicate a 62% chance of a statutory corporate rate hike next year."

The proof that investors are ignoring the tax hike is seen all over the market. 

The S&P 500 has set new highs on 41% of the trading days in the third quarter, the highest rate since the first quarter of 1998, per Kostin's research. Further, there have been 213 trading days since the last S&P 500 5% decline. That marks the ninth longest such stretch in the past 90 years, Kostin noted.

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However, investors may want to reacquaint themselves with the tax code and discounted free cash flow analysis.

The Wall Street Journal reported Monday that House Democrats soon plan to propose lifting the corporate tax rate to 26.5% from 21% currently. That's below the 28% rate President Biden has championed, but would still deal a blow to corporate bottom lines. Meantime, the WSJ reports House Democrats are considering raising the minimum tax on U.S. corporate foreign income to 16.5% from 10.5%. 

"This [higher taxes] is certainly a risk for equities across the board," said BofA U.S. equity strategist Jill Carey Hall on Yahoo Finance Live. Hall said any tax hike could be more impactful to U.S.-focused companies within the small-cap Russell 2000 and S&P 500.

As for Goldman's Kostin, he said he has baked in a "scaled down" version of the Biden tax plan into his S&P 500 earnings forecasts. 

"Relative to current policy, we estimate that a hike in the domestic statutory corporate tax rate to 25% and the passage of about half of the proposed increase to tax rates on foreign income will reduce S&P 500 earnings by 5%. As a result of incorporating tax reform into our model, our 2022 EPS forecast is 3% below the bottom-up consensus estimate of $220, which embeds an effective tax rate of 19%, compared with a realized effective rate of 18% since the 2017 tax cuts," Kostin explains. 

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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