Goldman says capital-gains tax hike would be ‘minor’ for stocks

Any capital-gains tax increase resulting from a Democratic “Blue Wave” victory on Election Day is unlikely to have a big impact on stock prices, according to Goldman Sachs Group Inc.

If Democrats sweep the White House, Senate and House on Nov. 3, one concern for investors has been the chance of an increased tax on capital gains and resulting headwinds for stocks. But while past capital-gains tax hikes have been associated with declines in equity prices and in total household equity allocations, Goldman said, the trend of net equity selling and declining stock prices around them has usually been brief.

“History shows stock prices fall, equity allocations decline, and Momentum underperforms ahead of increases in the capital-gains tax rate,” strategists led by David Kostin wrote in an Oct. 23 note. “However, any potential equity selling will be short-lived and reversed in subsequent quarters.”

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Goldman’s analysis dovetails with that of JPMorgan Chase & Co., which said recently that any hit to stock prices from a capital-gains tax hike would be brief, and stocks would likely resume their upward trajectory afterward. That offers a counter to strategists and wealthy investors already worrying about the potential tax hit to their portfolio — or a decline in stock markets — if a Blue Wave does occur.

“We expect U.S. household equity allocations will rise in 2021 irrespective of the election outcome. Rising economic growth expectations should support higher equity allocations next year. Equity fund flows have also usually increased following presidential elections,” the strategists said. “Regardless of the election outcome, we expect roughly 10 percent upside to the S&P 500 by the middle of next year.”