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Markets Equity Markets Sharemarket Goldman Sachs predicts decline in US shares Richard Richard RichardHenderson Henderson Henderson Markets reporter Jul 5, 2021 – 3.17pm Goldman Sachs is priming for US shares to begin falling from their record highs, driven by looming corporate tax reform and the impact of creeping government bond yields. The New York investment bank has set a year-end price target of 4300 points for the blue-chip benchmark S&P 500 index, 1.2 per cent below the record high achieved on Friday. The latest peak followed rosy rosy rosyjobs jobs jobsdata data data last week and capped a stellar run through the pandemic that has nearly doubled the value of US shares since the initial lows in March last year. “Expectations of higher interest rates and higher corporate tax rates by year-end are the primary reasons we forecast that the S&P 500 will trade sideways during the next six months,” said David Kostin, chief US equity strategist for Goldman Sachs. The analysts expect the US 10-year government bond to rise from 1.4 per cent to 1.9 per cent by the end of the year, putting pressure on long-duration stocks such as tech shares, which have attracted plump valuations based on future profits. Rising bond yields imply rising inflation, meaning those future earnings will be worth less to investors. “Aside from a late January disruption when a few meme stocks rocketed higher and sparked an epic short squeeze, the dominant macro driver of equity returns during [the first half] was interest rates,” Mr Kostin said. “Every investor needs to have a view regarding the forward trajectory of bond yields,” he said. Rise in corporate taxes The sharemarket also faces the likelihood of the US corporate tax rate rising, which was a plank of Joe Biden’s 2020 campaign. The tax rate fell from 35 per cent to 21 per cent in 2018 under Donald Trump, boosting corporate profits. Mr Biden has proposed increasing the rate to 28 per cent, midway between the new and old regimes. The higher tax rate is no sure bet and has already found resistance among Republicans. The US has also joined forces with G7 countries to agree agree agreeon on onaaa minimum minimum minimum15 15 15per per percent cent centglobal global globalcorporate corporate corporatetax tax, tax a plan Australia Australia Australiahas has hasalso also alsosupported supported. supported Higher US corporate taxes are unlikely to deliver a jolt of market volatility as Mr Biden has long telegraphed the plan, but will weigh on corporate profits. A higher tax rate would help the US pay for the trillions of dollars in fiscal stimulus injected into the economy through a series of initiatives that has included direct payments to Americans and an infrastructure infrastructure infrastructureplan plan planagreed agreed agreedamong among amongsenators senators senators in May. Roaring run A decline in US shares would knock them off the peak achieved last week, stunting a roaring run through the pandemic. The S&P 500 is up more than a third from the start of 2020, before COVID-19 began to weigh on financial markets, and a staggering 95 per cent higher than the lows in March last year. US shares ended June with the fifth-best first-half calendar year performance over the past 100 years, on a six-month rolling return basis, according to data compiled by Bank of America. The record-breaking rally would begin to resume only in 2022, according to Mr Kostin, who predicts US shares will grind 7 per cent higher next year, roughly in line with the long-term average annual growth for the market. The new price target for the S&P 500 from Goldman Sachs comes as blue chips within the benchmark begin to report second-quarter profits. Just two of the 18 companies within the index that have revealed earnings for the June quarter have failed to meet analysts’ expectations, according to Refinitiv, a data provider. On average, companies have exceeded analysts’ profit forecasts by 15 per cent, above the long-term average, but shy of the 20 per cent average over the past four quarters. Richard Richard RichardHenderson Henderson Henderson is a markets reporter based in our Melbourne newsroom. Connect with Richard on Twitter Twitter. 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