Yahoo Finance’s Brian Sozzi and Myles Udland discuss market outlook given Biden’s proposal of a higher corporate tax rate.

Video Transcript

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MYLES UDLAND: All right, welcome back to "Yahoo Finance Live." If you have watched our programming over the last couple of weeks, you know that there is no one in the financial media space more concerned about corporate taxes than Brian Sozzi. Sozzi, you looked at that in a piece on Yahoo Finance this morning. Walk me through it. I have something I would love to discuss on the other side as well.

BRIAN SOZZI: Well, I know you're pretty jacked up about this, Myles. And I'm just sad that Julie's on assignment this week because I know she would be excited to talk about this too as well. But yes, I have a piece right now on the Yahoo Finance homepage looking at three reasons why you're seeing the stocks at a record, even with increased talk and rhetoric out of DC on higher corporate taxes, which certainly look inevitable at this point.

So a hat tip to JP Morgan, who came out with these three reasons. First up, JP Morgan saying, strong liquidity position. Corporate America is in a strong liquidity position to withstand any increase in corporate taxes to 28%, or potentially, eventually, even higher than 28%. S&P 5-- the S&P, S&P noted late last year that companies are sitting on more than $2.5 trillion in cash.

That's a lot of cash, certainly a lot of cash could be used to buy back stock in the event that corporate taxes do, in fact, go up. Number two, a lot of companies are sitting on pretty sizable losses from last year. They could take those losses and apply them to future earnings and reduce their taxes. That is what you call a carry forward.

I know my brother is an accountant. He's watching right now. He's excited that I mentioned a carry forward Next, number three, taxes, theoretically, spent on infrastructure, JP Morgan notes, could increase the sales and profits for S&P 500 components, and more broadly, companies. So perhaps with those higher revenues and those higher profits, they can offset higher taxes.

But Myles, we've been talking about it consistently. This is all great. But if your taxes are going up, the bottom line is your profits are going to get hit. And I note in this story, Goldman Sachs is looking at a potential at least a 9% earnings hit in 2022 as a result of these potential increases in corporate taxes with 28%. So there will be an earnings impact.

I know a lot of folks don't want to talk about it, but this money has to come out of somewhere. And it could come right out of bottom line of a lot of companies.

MYLES UDLAND: Yeah, you know, something that I'm watching here, Soz, and I think we can go back to 2017 for a blueprint on this, the market priced in a lot of-- a tax cut, a lot of infrastructure spending, and kind of priced in just a new economic era, if you will, right after Trump was elected. And then the market really didn't do a whole lot of anything for a long time.

And all we talked about every day in 2017 was, are Republicans going to pass a corporate tax cut? Is the tax cut going to go to 15%, 20%, 21%? Where are we going to end up on the US corporate tax rate?

And it wasn't until we kind of got into December and it was like, oh, this is going to happen that we saw that final burst of the market saying, OK, we are going to now think about what it means for companies to perpetually pay a 40-- well, I guess the effective rate was 40% lower, 35 to 21, 40% lower than what they had on their tax burden going forward forever. But really, that second point is why the reaction wasn't maybe as all encompassing as we would have thought. That benefit has come out over time.

And the impact on the downside will also come out over time. And so I do think that, even if we get to a place, let's say, in July or kind of before that August recess, if Congress either passes or looks very likely to pass some kind of increase in the corporate tax rate, I'm not so sure that we're going to see a big one time reaction. Because as you mentioned, it's going to be phased in.

And this is a really-- taxes are always a show-me story for investors. They're not going to act until the ink is actually on the page. Because otherwise, you're just guessing when it comes to what lawmakers may or may not do.

BRIAN SOZZI: Yeah, they're not going to react, Myles, until XYZ big company comes out on earnings day in late 2022 and misses earnings estimate by $0.90, and then they hop on the earnings call and they say, hey, we had to pay higher taxes. That's why we just missed earnings estimates by $0.90.

But, you know, the market might be looking or just taking a page from what Transportation Secretary Pete Buttigieg has told me last week. He says, I grew up, and by extension, you and I, grew up when companies were paying about a 35% corporate tax rate. So if they were able to be competitive at 35%, why can't they be competitive 28%? Certainly, I'm just trying to present the other side of the coin here.

MYLES UDLAND: Yeah, and especially when we've had a number of folks come on and tell us that maybe 25% looks like a more likely compromise. Maybe it's 25% phased in through the government's fiscal year 2024 or something on that order. And really, I mean, we had the graphic out last week several times.

The effective tax rate that companies have been paying is significantly less than the statutory rate of 21%, just as it was significantly less than the statutory rate of 35% back before the Trump tax cuts. And so, really, the question here is, are we going to change how corporations do or don't get around current tax law?

If we don't change that, then I don't think, unless you're buying [INAUDIBLE], which tend to pay about that full statutory rate, you're really not going to, as an investor or a corporation, be dealing with a full 21% corporate tax [? charge. ?] That's just-- or 25%, 28%. Because that's not what you pay now. That's not what you've paid in the past.

So if that doesn't change, and I know that's why Janet Yellen has been talking about wanting to have that global tax system, I mean, Treasury needs to work in concert with its international partners if it wants to change that story. And that story is really, again, where it gets down to, how much is coming out of earnings or not coming out of earnings for a lot of these companies?

But again, a story we are certainly going to be staying on through the rest of this year, really for the rest of Biden's presidency if we don't get anything passed this year. One imagines this is not a one and done issue if we don't see movement on this front in 2021.