Red, white and tech
With the US presidential election around the corner, investors are wondering how various sectors may fare under each party. For technology, the S&P 500’s largest sector,¹ both parties agree on some issues, but not all, casting a veil of uncertainty over its future.
Ongoing strength of tech companies will be tested by forthcoming changes in tax, tariff and trade policies following the US election – regardless of who wins. That is because restrictions, in various forms, could be forced upon tech firms by both the Democrats and Republicans.
Due to the US economy’s current fragility and the need for optimal recovery conditions, many commentators believe Democrats will be restricted in how much they can do if Joe Biden takes the helm. Despite this, if he does win, his future administration plans to raise the corporate tax rate from 21% to 28%,² which would partially undo the Trump administration’s 2017 corporate tax cut from a prior rate of 35%.³
Mellon senior research analyst Justin Sumner says, if Dems win and hike corporate taxes, the rotation into big tech, which accelerated during the pandemic, is likely to continue and may even intensify. This is because of the perception that tech companies have robust balance sheets and complex tax planning strategies. However, if Republicans win, he says investors may act entirely different.
“Because of the perception that Republican policies may be more favorable for traditional industries, a Republican win could lead to a rotation into some of the sectors that have been weak as of late,” Sumner says. If history is any indication of the future, this should come as no surprise. Financials, industrials, and the oil and gas sector all rallied in 2016 when Donald Trump won the election.⁴
Robert Zeuthen, senior portfolio manager on the Mellon Small Mid Cap Equity team, agrees and says rising taxes would likely slow economic growth, which could in turn benefit technology stocks.
But Zeuthen adds, the tax issue isn’t as simple as it may seem. “It’s not just the absolute level of taxes we’re paying attention to—but it’s the certainty that there’s a minimum level,” Zeuthen says. Democrats have proposed a minimum corporate tax rate of 15%.⁵
As stocks are primarily valued on discounted future cash flows, which incorporate long-term fundamentals, interest rates and tax rates, the imposition of a minimum tax rate will likely have an effect on post-election investor appetite for certain companies, he adds.
Another issue where there may be partisan divergence is the use of tariffs and overall trade policy. While Democrats haven’t shared many details regarding their trade plan, the current administration has relied on tariffs as a tool for foreign negotiation and protectionism. In fact, the US and China have been caught in a trade war since 2018, resulting in more than 300 tariffs on imports from China.⁶ And if they win the election, the current administration could continue using the tool with the same intensity.
Sumner says tariffs imposed over the past two years have not been as detrimental to big tech’s bottom line as some may think. That said, he says foreign policy became more impactful to the sector when the Department of Commerce began pursuing China-based tech company Huawei for the purpose of national security.
“The Trump administration views Huawei as a potential national security threat and they’re trying to slow down its advancements in key technologies like 5G in order to prevent it from becoming a dominant player globally,” Sumner says. “For instance, the current administration recently moved forward with putting restrictions on a main supplier of semiconductors by limiting its ability to sell to Huawei.”
Because of the US’s increasingly limited presence in semiconductor manufacturing, this is now beginning to be seen as a national security risk, Sumner adds. As a result, he believes the current administration may pursue policies to encourage greater localization of semiconductor manufacturing.
Sumner notes the Trump administration has been vocal on the Huawei issue but he is less certain where Democrats sit. Still, if Democrats do win the election, it may not matter much. The US government could be forced to continue protectionism, regardless of which party prevails, to ensure the country maintains its lead as the world’s dominant technology player. After all, if certain US tech companies lose their edge to foreign players, it could be catastrophic for international revenue streams, according to Sumner.
Zeuthen adds, “China is very much focused on building its own technology and semiconductor industry. And it’s likely to continue its strategic ambitions regardless of what happens to tariffs so, even if the US did soften its stance, China’s resulting actions are somewhat unclear.”
“The geopolitical landscape, regarding trade policy, is still difficult to foresee with the potential change in administration,” he says.
Agree to disagree
Despite a clear distinction in some US policy initiatives—there are others that are more bipartisan and will likely be pursued regardless of who wins. These topics include current and future antitrust investigations against four fifths of the FAANGs,⁷ and ushering the sale of foreign social media companies to US tech companies because of the former’s potential threat to national security.⁸
One common goal, where there are still differences, surrounds bolstering the nation’s infrastructure. While both parties have said this will be a priority in 2021, the type of infrastructure, as well as the technology needed, will vary according to a split in partisan agendas.
Republicans have been vocal about boosting old school infrastructure like highways, bridges and airports—the latter of which is deeply wounded from the pandemic’s initial shock.⁹ And Biden has made headlines introducing a green new deal, which includes installing 500,000 public charging outlets for electric vehicles and making buildings more energy efficient.¹⁰ However, Zeuthen says whether the White House goes green or not isn’t the only way infrastructure could influence the technology sector.
Despite which party wins, the US—like many other countries—is still grappling with the new reality of a post-Covid world and what that means for infrastructure will undoubtedly trickle into the technology sector, according to Zeuthen.
“We need contact tracing, smart grids, renewable energy, improved visibility on food safety, more security, and distance learning,” Zeuthen says. “When you think about those different initiatives, almost all of them could certainly benefit technology.”
“No matter who wins the election, the need to have better data and the ability to quickly analyze and conclude from that data isn’t going away anytime soon,” he concludes.
¹The Balance: What is the Weighting of the S&P 500? May 28, 2020.
²Committee for responsible budget: Understanding Joe Biden’s 2020 Tax Plan. July 30, 2020.
³The Washington Post: Corporations paid 11.3 percent tax rate last year, in steep drop under Trump’s law. December 16, 2018.
⁴Forbes: Where to Invest For a Trump 2020 Win, Or a Biden Win. July 29, 2020.
⁵Forbes: Where to Invest For a Trump 2020 Win, Or a Biden Win. July 29, 2020.
⁶Forbes: TPP, Tariffs And China: What Biden Might Do On U.S. Trade Policy. August 25, 2020.
⁷Brookings Institution: The tech antitrust hearings are over: What’s next for enforcement? August 11, 2020.
⁸Washington Post: Trump says U.S. treasury should collect ‘very substantial’ portion of TikTok sale to American firm. August 3, 2020.
⁹International Finance Corporation: The Impact of Covid-19 on airports: An Analysis. May 2020.
¹⁰Bond Buyer: Democrats’ infrastructure agenda would benefit market.
August 20, 2020.