“If Biden’s tax plan were completely enacted, FAAMG 2022 earnings would lower by around 9% relative to expectations,” Kostin says. By contrast, the S&P 500’s numbers would be lowered by 8% under the new tax rate.
The Biden team is hoping to increase the corporate tax rate from Trump’s 21% to 28%.
He is also preparing an increase on the capital gains tax for the wealthiest Americans to 43.4%, including a surtax to pay for “infrastructure” changes. The current capital gains tax is at a top rate of 23.8%.
Kostin says these FAAMG stocks are vulnerable to any uptick in the capital gains tax.
“If the capital gains tax rate rises in 2022, investors who are subject to the new rate might choose to realize their gains in 2021 at the lower rate. The FAAMG stocks have grown by $5 trillion during the past 5 years, being 29% of the S&P 500 value increase during this time,” Kostin says.
Kostin continued, “The tax reform plan from President Biden would increase both capital gains and corporate tax rates and mean more risk for the FAAMG stocks.”
FAAMG fans seem to be ill-prepared for any change in the bottom line numbers under the new administration.
Goldman’s research has discovered that FAAMG stocks trade at a forward P/E multiple of 29 times, in contrast to 21 times for the other 495 stocks on the S&P 500. This is a 34% premium for the five largest stocks.
These stocks alone account for a shocking 21% of the S&P 500’s value. That’s not only much more than the long-time average of 14%, but also the 18% which was seen at the top of the tech bubble in 2000.