Curbing Inflation Act: Stock Market Winners and Losers

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On Tuesday, President Joe Biden signed the monumental Inflation Reduction Act (IRA). Although the radical initiative focuses on climate policy, health care and taxes, investors should be aware that there are certainly implications for equities – some parts of the market stand to benefit greatly.

The IRA aims to reduce the cost of prescription drugs, health care premiums and energy for millions of Americans. While it probably won’t reduce inflation, as its name suggests, the law could certainly have a broad economic impact, as it touches on everything from the climate crisis to corporate taxes.

Financial markets began reacting to the legislation long before it hit Biden’s desk. Share prices of fuel cell company Plug Power and solar energy company SunPower, for example, have jumped more than 50% since Senator Joe Manchin III of West Virginia said in late July that he would support the legislation.

However, the full ramifications of the law may not have hit the stock market yet, and experts say some areas still have room to benefit, while others could be affected. Here are the potential winners (and losers) of the Inflation Reduction Act market.

Market Winners of the Inflation Reduction Act

Clean energy companies

The IRA allocates $369 billion for energy security and includes tax credits for clean energy and electric vehicles.

“The energy sector is perhaps best positioned to be favorably impacted,” said Terry Sandven, chief equity strategist at US Bank Wealth Management.

In the past, the United States generally relied on imports of solar equipment. This law will encourage more production at home with incentives for home solar panels and inverter manufacturing, according to David Sekera, Morningstar’s chief U.S. market strategist.

Companies that focus on residential solar power, hydrogen, energy storage and home manufacturing could benefit from the legislation, with the top three potential beneficiaries being SunPower, First Solar and Plug Power, Sekera adds.

While investments in solar and energy companies could struggle in the short term in the face of rising interest rates – like much of the market – they could earn overtime, especially with the changes included in the IRA, says Michael Becker, associate wealth advisor at Hightower Wealth Advisors.

“If you’re going into space now, there are probably challenges,” Becker says. “But if you’re a long-term investor, you’ll definitely see a return on solar in the future.”

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Electric vehicle manufacturers

The IRA includes a $7,500 consumption tax credit extension for the purchase of new electric vehicles (EVs) and plug-ins that meet certain criteria, and it adds an additional $4,000 credit for the purchase of a used EV.

Many electric car companies will likely benefit, says Mychal Campos, chief investment officer at online investment advisory firm Betterment. But not everyone will benefit from it in the same way.

The law caps eligibility for tax credits at $55,000 for the price of cars and $80,000 for trucks and vans.

The cap “really limits earnings for a company like Tesla,” Campos said. (Most new Teslas sell for well over $55,000.)

As Morningstar equity strategist Seth Goldstein pointed out in a recent market update from the company, the entire electric vehicle supply chain stands to benefit. This includes lithium producers, as lithium is a crucial element in the batteries that power most electric vehicles.

Lithium Americas, Ablemarle and Livent could benefit, Sekera says.

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Materials, Industrial and Utilities Companies

Energy-related inclusions in the law could also help companies in the materials and industrials sectors, Sandven adds.

“While this law leads to lower energy prices, energy is a key entry cost for companies in the materials and industrials sectors, which should help increase overall profit margins over time. time,” he said.

It could also positively impact utility companies to some degree, Sandven adds.

Market losers from the Inflation Reduction Act

Tax evasion giants

The IRA includes a provision to impose a minimum corporate income tax of 15% on companies earning at least $1 billion.

This is going to have a negative impact on multinational companies that are paying lower tax rates right now because their bottom line could be lower, says David Wagner, portfolio manager at Aptus Capital Advisors. But experts say relatively few businesses will actually be affected.

According to an April report by the Center for American Progress, 19 Fortune 100 companies paid little or no taxes in 2021. Amazon, Microsoft, Nike, Coca-Cola and UPS were among the top US companies that benefited from effective tax rates of less than 10%, the authors of the report wrote.

Shareholders of companies carrying out takeovers

The new legislation includes a 1% tax on stock buybacks, which occur when a company buys shares of its own stock on the open market. Buybacks allow companies to improve the price of their own shares by decreasing the number of shares available to the public. When the number of shares held by shareholders in the public market decreases, the stake of the shares that are in the public market should increase – as well as the stock price as a whole.

When you think of stock buybacks, you might immediately think of giants like Apple, which spend more money buying back stock than any other company in the S&P 500, CNBC reported in January.

But it could also hurt shareholders.

“Shareholders of companies that pursue share buyback programs could be the losers under the law, as they will ultimately bear the burden of the 1% tax” on share buybacks, said Greg Bassuk , CEO of AXS Investments, to Money via email.

On the other hand, it could benefit dividend-paying stocks, says Wagner. (A dividend is a certain sum of money regularly distributed to shareholders from the profits of a company.)

The tax on share buybacks could make paying dividends more tax-efficient for businesses than buying back shares, he says. If more investor money goes into dividend-paying stocks instead of buyouts, dividend-paying stocks could outperform; it’s an imbalance between supply and demand, adds Wagner.

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Pharmaceutical companies

It may not be fair to label the pharmaceutical companies as losers, as it’s not entirely clear what impact this legislation will have on the space. But the Inflation Reduction Act includes big changes to Medicare that will affect drug companies. The legislation caps out-of-pocket drug costs for Medicare beneficiaries at $2,000 a year and would allow Medicare to negotiate prescription drug prices directly with pharmaceutical companies — a move that is expected to lower drug costs for consumers. .

Although the goal is to make necessary medicines more affordable, we do not yet know which medicines will be eligible for price negotiations. It is therefore difficult to predict which companies will be affected and to what extent.

While pharma stocks were negatively affected during the initial announcement of the new IRA prescription drug pricing, Solita Marcelli, investment director for the Americas at UBS Global Wealth Management, wrote in a note to clients. early August that the impact “will be manageable from a revenue perspective.”

“Lower drug prices will be offset by higher volumes under expanded Obamacare,” Marcelli wrote.

One concern is that falling drug prices could also push biotech and big pharma to cut research and development costs, which could stifle future innovation and slow the introduction of new drugs. , Sandven said.

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