S&P 500 corporate earnings face a bigger threat from economic conditions than from taxes in the Inflation Reduction Act, investment strategist says

• S&P 500 earnings should take just a "modest" hit from the Inflation Reduction Act, said investment firm Glenmede.
• Earnings face a bigger threat from the macro environment with inflation still running hot.

The risk of recession for the US economy poses a bigger threat to earnings made by S&P 500 companies than the taxes included in the upcoming Inflation Reduction Act, according to wealth management firm Glenmede.

President Joe Biden said he plans this week to sign the legislation passed by the House last week. Proponents say the Inflation Reduction Act stands to cut the federal deficit by $300 billion over 10 years and invest $388 billion in US energy production to reduce carbon emissions by about 40% by 2030.

The legislation will be paid for in part by setting a minimum corporate tax rate of 15% for companies that generate at least $1 billion in revenue and through a 1% tax on share buybacks.

A small number of S&P 500 companies should see "only a modest hit to earnings in aggregate" from the Inflation Reduction Act, Jason Pride, chief investment officer of private wealth and Michael Reynolds, vice president of investment strategy at Glenmede, said in a note published Monday.

"The 1% tax on share buybacks, combined with a new minimum 15% book income tax on corporations, is estimated to lower the 2023 earnings of the S&P 500 by about only 1.0% - 1.5% per share," said Glenmede, which has $45 billion of assets under management. "The ongoing deterioration in the macroeconomic picture in the U.S. poses a much larger threat to 2023 earnings than the new taxes via the Inflation Reduction Act."

Rampant inflation has pushed the US economy toward the brink of a recession. Gross domestic product shrank 0.2% in the second quarter after economic activity contracted 1.6% in the first quarter of 2022.

Glenmede said while experts generally agree the Inflation Reduction Act will modestly help ease price pressures over the long-run, it may not help dramatically curb Inflation in the near-term. The firm said the Penn Wharton Budget Model estimated the legislation would slightly increase inflation until 2024 and decrease inflation thereafter, estimating a 0.25% decline in the price index by the late 2020's.

Consumer price inflation was running at a still-hot rate of 8.5% in July, although the headline figure softened from 9.1% in June, the highest reading in 41 years.

"[It's] far from mission accomplished" for the Federal Reserve with core CPI still growing at a near 6% clip, said Glenmede, noting that CPI looks sticky with still-rising shelter costs that make up about 30% of the CPI market basket.

There was a record $281 billion of share buybacks in the first quarter of 2022, according to S&P Dow Jones Indices.

Apple was the top spender on share repurchases during that period, at $23 billion, followed by Google's parent company Alphabet, at $13.3 billion. Meta Platforms, formerly known as Facebook, logged $10.4 billion in buybacks in the first three months of the year, and Microsoft had $8.8 billion. The top 5 list was rounded out by S&P Global at $7.1 billion.

The 15% corporate tax should raise $222 billion and the 1% buybacks fee should raise $74 billion, according to Senate Democrats citing estimates from the Joint Committee on Taxation.