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No matter how you look at it, 2020 has been rough on Big Finance.
Financial stocks are the second worst performer in the S&P 500, down more than 24% year to date as of the Sept. 23 close. There are plenty of culprits. Interest rates are near zero, cutting into banks’ bread-and-butter lending business. Meanwhile, the pandemic has put a big fat pause on economic activity, squeezing investment banking fees and ratcheting up the risk of underperforming loans.
Making matters worse, even as the economy begins to recover, and M&A picks up, investors continue to punish Wall Street. The KBW Nasdaq Bank Index has slumped 38% this year while the benchmark S&P 500 is up slightly.
In other words, Big Finance needs a big lift. Could it possibly come from Washington in an election year?
It’s not such a wild question. Every four years, Wall Street lobbyists draw up a wish list to put in front of the incoming administration. They usually start working on it well before Inauguration Day. This is what could be on such a memo this year.
It’s no secret that President Trump has been a tax hawk, slashing the corporate tax rate from 35% to 21%, a move that went into effect in 2018. The positive result was a boom for the stock market, and a windfall in trading revenues for the banks. The downside? Mammoth deficit-spending that will have to be paid off down the road—either through increased taxes or through fiscal austerity measures. (Spoiler: Even before the coronavirus pandemic, the economy just wasn’t growing fast enough to magically plug that deficit hole.)
Just about every Fortune 500 CEO, Wall Street bosses included, wants to see this corporate tax rate hold steady. And so they’re a bit concerned with Democratic presidential candidate Joe Biden’s proposal to increase the rate businesses have to pay the tax man.
“If Biden wins and you get the Senate to flip, then there’s a good chance you get the corporate tax rate to go from 21% to 28%. Just doing the simple math takes the S&P 500 earnings down in the neighborhood of 10%,” Jeff Buchbinder, vice president and market strategist at LPL Financial Research, said on the Market Signals podcast this week.
(Remember that 10% figure. We’ll come back to it in the “Free trade” section.)
The rest of the Biden tax plan seeks to weaken Trump’s 2017 Tax Cuts and Jobs Act by raising taxes on a combination of income, Social Security, long-term capital gains, and qualified dividends for the upper-income brackets.
Unless it’s a clean sweep by the Democrats, none of this will happen. But the finance pros are still running the numbers on any and all possibilities, and what it would mean.
“I think if there was really to be a significant increase on taxation, on dividends, it would hurt dividend-paying companies and those sectors—utilities, consumer staples, and financial—that rely more heavily on them,” says David Bahnsen, founder and managing partner of the Bahnsen Group, a private wealth management firm with $2.5 billion in client assets under management.
But, Bahnsen adds, Wall Street—and by Wall Street, he’s also including investors like his clients—is not freaking out about the prospect of higher taxes. There’s concern, but not full-on alarm. “Obama,” he notes, “had all the political capital to let Bush’s tax cuts sunset in 2010. And he punted it out two years and cited, accurately, that it would be a bad thing to do in the midst of an economic recovery. I have every expectation that Biden would do the same thing.”
And besides, he adds: “What we do know is that not a single President in American history has had a tax plan in their campaign that then got photocopied and became a tax law. Ever.”
So at the top of the wish list you might see the words “1) Taxes: Don’t do anything drastic.”
The irony of this one is well known to Washington insiders—and Wall Street too is now grasping the cruel twist. It goes something like this: Unlike with tax policy, there is actually plenty of bipartisan support for vast spending measures to rebuild America. And yet there’s little to no chance that, say, a Democrat-controlled Congress would give a Republican President the pleasure of signing such a spending bill into law. And vice versa.
It would almost certainly require one-party control to get a massive fiscal stimulus spending package to come to fruition.
And yet Wall Street can still dream of one.
Corporate America would love a big fat spending bill to jump-start the U.S. economy. And Big Finance would be among the industries to benefit most from any incentives that led to a building boom, particularly one that got America back to work. If nothing else, such a reality would conceivably lead to the conditions needed for the Federal Reserve to eventually raise interest rates again, a move that would help banks’ balance sheets dramatically.
Any spending measures—whether it be to modernize America’s roads and airports (Trump deplores the state of American airports, particularly LaGuardia Airport in New York) or Biden’s $1.7 trillion promise to build a “clean energy future”—would be most welcome to Big Finance.
So, here’s point No. 2: Spend, spend, spend.
“I promise you,” Bahnsen says, “there is nobody that’s going to let the debt get in the way of spending more money.”
Trump’s trade wars have put the chill on global business, and that’s come home to roost on the bottom line of America’s biggest businesses. Yes exporters are hit, but the impact can be felt across the economy, to Wall Street too. Consequently, LPL Financial’s Buchbinder calculates that the removal of trade tariffs with China would add billions to the earnings of S&P 500 companies.
Under a Biden presidency, Buchbinder reckons, “you’d get spending potentially—green energy spending, infrastructure spending, and the like—plus reduction or elimination of some China tariffs. That would offset some of the drag on corporate earnings that you’d get from the possible corporate tax increase.”
This is spelled out in the chart below, furnished by LPL Financial.
At the moment, the consensus estimate is for the earnings per share of S&P 500 companies to climb nearly 20% year over year in 2021—that’s in a world of low taxes and free(r) trade. For example, the EPS boost alone from the removal of Chinese tariffs would amount to a 16% increase in corporate profits. Keeping the corporate tax rate as is would result in a smaller, but still meaningful, 10.6% rise in profits.
Dear President, the letter might then read, let’s go back to free and open global trade. It’s good for growth. And see point No. 1 about taxes.
Wall Street regulation
Wall Street is always wary of further regulatory scrutiny. This year is no different. But as long as the economic recovery is job one of the President, the concerns about additional red tape or stepped-up oversight are on the back burner.
There just doesn’t seem to be the political will at the moment to rein in Wall Street. “An attempt to re-amplify pressures around the Volcker Rule, capital requirements, etc., will not be viewed favorably” by Washington, Bahnsen says.
That said, one hot-button issue that’s getting bipartisan attention is stock buybacks. If Wall Street reform is on the agenda of Congress or the White House next year, this could become a casualty.
But otherwise, Wall Street will be looking to present itself to the new administration as part of the solution in getting America’s economy off the floor.
There’s an obvious motive: The bosses of Big Finance are desperate to avoid a repeat of 2020.
More from Fortune‘s special report on what business needs from the 2020 election:
- What voters need from the 2020 election: Common ground
- What business needs from the 2020 election
- What small-business owners need from the 2020 election
- What restaurants need from the 2020 election
- What Silicon Valley needs from the 2020 election
- What unbanked Americans need from the 2020 election
- What the health care industry needs from the 2020 election