Want to be a stock market bear? BCA says watch potential U.S. tax increases
Investing.com -- BCA Research said it remains bullish on equities, but that anyone looking for a reason to turn bearish should watch for coming tax increases, more so than the surge in bond yields.
In its GeoMacro report, BCA’s top strategist Marko Papic said investors are wrong to get bearish on rising yields, which reflect robust growth. He argued the Federal Reserve is targeting long-term inflation expectations tied to geopolitics, not growth or asset prices, and that the war in Iran is effectively over.
"Want to be a bear? Beware tax increases in the U.S.," he wrote.
Papic said U.S. individual, corporate, and capital gains tax rates "have bottomed." He expects a Democratic sweep in the midterms, putting the odds near 75% versus 64% on Polymarket, and sees Democrats campaigning on budget discipline and tax hikes as early as summer 2027.
"The U.S. fiscal lever is done as a tailwind to growth," the strategist wrote, "but taxes are looming as a serious headwind." History suggests a single tax change rarely moves equities, since such changes are usually announced well ahead and priced in. Packages that raise several taxes at once do.
Markets announcing increases to two or more taxes in the same month had lagged MSCI World by about 3% in the prior six months and ended the next year about 6 points behind. Of 51 packages in BCA’s sample, 65% lagged.
Corporate tax hikes announced on their own were followed by no underperformance. Papic said investors appear to read a package as a signal of fiscal stress and weaker growth, and that equities, not currencies, drove most of the shortfall. Bond yields gave no warning beforehand.
Papic pointed to recent examples. France lagged MSCI World by about 9% in the six months before its October 2024 budget, which combined a surtax on large companies with a minimum tax on high earners. The U.K. lagged by 3% to 6% before each of its last three tax-raising budgets.
Booming profits and growth mean higher taxes are unlikely to end the bull market yet, he said, though investors should expect "indigestion in 2028, or maybe even 2027."
Papic flagged rising wages in 2027, which could make the Fed genuinely hawkish, as the other risk to watch.