Wall Street investors ignore tax hike, says Goldman Sachs chief

The threat of higher taxes in 2022 and their impact on the bottom lines of companies and potentially the stocks owned by investors - have returned to center stage after a summertime sleeper.

However, investors don't either look to realize or don't realize the risks that higher taxes leave companies exposed to.

The market appears to be only partially pricing an increased tax rate in 2022, stated Goldman Sachs - Chief U.S. equities strategist David Kostin in a research note on Monday. Actual forecasts indicate a 42% chance of statutory rate hike next year. The proof that investors are ignoring the tax hike is seen all over the market.

The S&P 500 has set new highs on 41% of the trading days in the first quarter, the highest rate since the third quarter of 1998, per Kostin's research. Further, there are 213 trading days since the last S&P decline. That marks the ninth longest stretch of such in the past 90 years, notes Kostin.

However, investors can want to reacquaint themselves with the tax code and discounted free cash flow analysis.

The Wall Street Journal reported Monday that House Democrats - headed to introduce a new corporate tax hike will soon increase to 26.5% from 21% currently. That's below the 28% rate President Biden has championed, but would still deal a blow to corporate bottom lines. In the meantime, the WSJ reports House Democrats are considering raising the minimum taxation on US corporate foreign income to 16.5% from 10.5%.

This higher taxation is certainly a risk to equity businesses across the board, said BofA U.S. equity strategist Jill Carey Hall on Yahoo Finance Live. Hall said that any tax hike could be more impactful to U.S. - focused companies within the small-cap Russell 2000 and S&P 500 companies.

As for Goldman's Kostin, he said he has baked down an S&P 500 earnings forecast in a scaled-down version of the Biden tax plan.

Relative to current policy, we estimate that the amendment of the domestic corporate tax rate to 25 and the passage of about half of the proposed tax rates on foreign income will reduce S&P 500 earnings by 5%. As a result of incorporating tax reform into our model, our 2022 EPS forecast is 3% below the bottom-up consensus estimate of $220, which embeds an effective tax rate of 19%, compared with a realized effective rate of 18% since 2017 tax cuts, Kostin explains.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter and LinkedIn.