The Winners And Losers From The US Economic Bill

The Winners And Losers From The US Economic Bill
Carl Hazeley

over 1 year ago5 mins

  • EV makers like Tesla and GM are likely to benefit from the US’s sprawling new climate bill, along with green energy producers and oil companies.

  • On the other hand, healthcare and technology companies are relative losers from the new bill, facing lower revenues or higher costs as a result.

  • There’s also a new tax on share buybacks: though relatively low, it could have an increasingly negative impact on the US stock market if it’s raised in the future.

EV makers like Tesla and GM are likely to benefit from the US’s sprawling new climate bill, along with green energy producers and oil companies.

On the other hand, healthcare and technology companies are relative losers from the new bill, facing lower revenues or higher costs as a result.

There’s also a new tax on share buybacks: though relatively low, it could have an increasingly negative impact on the US stock market if it’s raised in the future.

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The US government is set to sign the Inflation Reduction Act into law this week – a massive economic package that includes $370 billion worth of climate-related spending among one or two other things. So let’s take a look at the bill’s winners and losers, and how it’ll affect your portfolio...

Who are the winners from the bill?

1. Electric vehicle manufacturers.

The package will extend consumer tax credits worth $7,500 on the purchase of a new electric vehicle for another decade (worth an estimated total of $12 billion). And that should help support customer demand for EVs. Importantly, the tax credit previously had a 200,000-car limit, meaning EV juggernauts like Tesla, General Motors, and Toyota – which had sold more cars than that in the US – weren’t eligible, but that cap’s being removed. That should give demand for these carmakers’ EVs a particular boost.

And what might prove a further boon for those legacy EV makers is that new cars costing more than $55,000 and SUVs over $80,000 don’t qualify for the tax credit. Tesla and GM have cars that fit the bill, but startup rivals Lucid Motors and Rivian don’t, so they’ll be at a disadvantage until they introduce cheaper models.

2. Renewable energy.

Solar company Sunrun, energy storage and software provider Stem, and hydrogen and fuel cell company Plug Power are up next: they’re all poised to benefit from tax credits worth $120 billion in the bill. There’s also $30 billion in tax benefits in there for nuclear power providers: companies like Southern Co, Constellation Energy, Public Service Enterprise Group, and Energy Harbor are likely beneficiaries.

3. Oil companies.

A boost to existing tax credits for carbon capture and storage, and new credits for producing “green” hydrogen lasting 10 years is where oil and gas companies come in, with the likes of Exxon and Occidental likely to benefit.

US energy transition spending overview. Source: Bloomberg.
US energy transition spending overview. Source: Bloomberg.

And who are the losers in all this?

1. Pharmaceutical companies.

The new law will allow Medicare to negotiate with Big Pharma firms on drug prices for the first time ever. Given the bargaining power the US’s national health insurance program is sure to have, it means the revenues drug companies are likely to earn will take a hit. Analysts expect pharma firms to partially offset this by hitting private insurance customers with higher drug prices, but insurers are pretty big customers too, and some pharma firms may find themselves stuck between a rock and a profit-costing hard place.

2. Technology companies.

Part of the bill introduces new taxes, including one that’ll hit tech companies right in the profits: a 15% minimum tax on financial statement profits. Big Tech has been notoriously able to tamp down the amount of tax they pay the US government, despite being very profitable outfits on average, thanks to deliberate inconsistencies between the statements they show investors and the ones they show the taxman. But new rules state that whatever profit is shown on a firm’s financial statements (i.e. the ones investors look at) will attract a direct tax. Bloomberg reckons Alphabet and Meta are likely to be among the most well-known companies negatively affected, but you can expect this to hit the entire tech industry.

Bigger picture: these higher costs could also knock companies’ incentive to hire workers and could lead them to spend more money on automation instead.

3. Companies that want to buy back their own stock.

US companies have announced a record level of share buybacks this year, but a new tax will make future buybacks less attractive. Companies will have to pay a 1% tax on the shares they repurchase.

In the short term, that could drive companies to shoot ahead and get buybacks in before the taxes take hold, which could give US stock markets a boost.

In the medium term, meanwhile, there are two potential impacts worth considering: first is the effect on per-share earnings. See, buybacks reduce the number of shares out there, so the same amount of profit spread among fewer shares creates a higher earnings per share (EPS) figure – a key metric for investors. With companies disincentivized to buybacks shares (admittedly only slightly), EPS figures could come in lower than expected. That’s tied to the second potential impact: that the tax could knock the overall profit figure to begin with.

And longer term, if the newly introduced tax is hiked higher, it’d further dent companies’ desire to buy back their own shares, dampening an important source of demand (and therefore upward force) on the US stock market.

Why act on this now?

The new US law hasn’t been signed just yet, and the new taxes and tax credits will take time to come into effect. And what’s more is that the scope of these new incentives (and disincentives) is 10 years, not one or two. All that to say: this is a long-term opportunity that’s more of a slow burn than a short-term burst…

But stock market investors aim to “discount” the future into today’s price. They make their best guesses at how things will play out for companies in the future – e.g. more sales for Tesla, higher taxes for buyback king Apple – and work out what impact that should have on future profits and therefore share prices today. And while that’s an uncertain gambit, stock prices will already have moved to reflect the average of investors’ views of the likely outcomes, putting pressure on stockpickers to refresh their analyses and update their holdings accordingly.

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