Inflation Reduction Act: Winners and Losers in the Stock Market

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President Joe Biden signed the landmark Inflation Reduction Act (IRA) on Tuesday. While the sweeping initiative focuses on climate policy, healthcare and taxation, investors should be aware that there are certainly implications for equities – with some areas of the market likely to benefit greatly.

The IRA aims to reduce the cost of prescription drugs, health insurance premiums, and energy for millions of Americans. While it probably won’t actually cut inflation as the name suggests, the law could certainly have a broad economic impact, as it affects everything from the climate crisis to corporate taxes.

The financial markets started responding to the legislation long before it went to Biden’s desk. For example, the stock prices of fuel cell company Plug Power and solar energy company SunPower have risen more than 50% since Senator Joe Manchin III of West Virginia said in late July that he would support the legislation.

However, the full ramifications of the law may not have hit the stock market yet, and experts say certain areas may still benefit while others may be harmed. These are the potential market winners (and losers) of the Inflation Reduction Act.

Market winners of the Inflation Reduction Act

Clean energy companies

The IRA allocates $369 billion in energy security and includes tax credits for clean energy and electric vehicles.

“The energy sector may be best positioned to be favorably impacted,” said Terry Sandven, chief equity strategist at US Bank Wealth Management.

In the past, the US has generally relied on imports for solar energy equipment. According to David Sekera, Morningstar’s chief US market strategist, the bill will encourage more domestic production with incentives for domestic solar panels and inverter manufacturing.

Companies targeting residential solar, hydrogen, energy storage and domestic manufacturing could get a boost from the legislation, with the three main potential beneficiaries being SunPower, First Solar and Plug Power, Sekera added.

While investments in solar and energy companies could struggle in the short term amid rising interest rates — like much of the market — they could pay back overtime, especially with the changes included in the IRA, says Michael Becker, associate wealth advisor at Hightower Wealth Advisors.

“If you go into space now, there are likely to be challenges,” Becker says. “But if you’re a long-term investor, you’re definitely going to see a return on solar energy in the future.”

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Electric Vehicle Manufacturers

The IRA includes an extension of the $7,500 consumer tax credit for buying new electric vehicles (EVs) and plug-ins that meet certain criteria, and it adds an additional $4,000 credit toward buying a used EV.

Many of the electric car companies are likely to benefit, said Mychal Campos, head of investing at online investment advisory firm Betterment. But not everyone will benefit equally.

The law limits eligibility for tax credits to $55,000 for the price of cars and $80,000 for trucks and vans.

The cap “really limits profits for a company like Tesla,” Campos says. (Most new Teslas sell for over $55,000.)

As Morningstar stock strategist Seth Goldstein noted in a recent market update from the company, the entire EV supply chain should benefit. So are lithium producers, as lithium is a critical element in the batteries that power most EVs.

Lithium Americas, Ablemarle and Livent could benefit from this, Sekera says.

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Materials, Industry and Utilities

The energy-related inclusions in the law could also help companies in the materials and industrial sectors, Sandven added.

“If this move causes energy prices to fall, energy is a major input cost for companies in the materials and industrial sectors, which should help increase overall overtime profit margins,” he says.

This can also positively impact utilities to some extent, Sandven adds.

Market losers from the Inflation Reduction Act

Giant tax-avoiding companies

The IRA includes a provision to impose a 15% minimum tax on corporate profits on companies that make at least $1 billion.

That will negatively affect the multinational companies that are now paying lower tax rates, as their bottom line could be lower, said David Wagner, portfolio manager at Aptus Capital Advisors. But experts say relatively few companies are actually affected.

According to a report published in April by the Center for American Progress, 19 Fortune 100 companies paid little or nothing in taxes in 2021. Amazon, Microsoft, Nike, Coca-Cola and UPS were among the major U.S. companies with effective tax rates below 10%, the report authors wrote.

Shareholders of companies making buybacks

The new legislation includes a 1% tax on share buybacks, which occurs when a company buys its own shares on the open market. Buybacks allow companies to improve their own share price by reducing the number of shares available to the public. When the amount of shares that shareholders hold in the public market decreases, the ownership interest of the shares in the public market should increase – along with the overall price of the stock.

When you think of share buybacks, you might immediately think of giants like Apple, which spends more money on share buybacks than any other company in the S&P 500, CNBC reported in January.

But it can also harm shareholders.

“Shareholders of companies pursuing share buyback programs may be losers under the law as they will ultimately bear the burden of the 1% tax” on share buybacks, Greg Bassuk, CEO of AXS Investments, told IPS. email to Money.

On the other hand, this could benefit dividend stocks, Wagner says. (A dividend is a specified amount of money regularly paid to shareholders out of a company’s profits.)

The tax on share buybacks could make paying dividends more tax-efficient for companies than buying back shares, he explains. If more money from investors goes into dividend-paying stocks rather than buybacks, the dividend stocks can outperform; it’s an imbalance between supply and demand, Wagner adds.

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Drug companies

It may not be fair to call pharmaceutical companies outright losers, as the impact this legislation will have on the space is not exactly clear. But the Inflation Reduction Act does include major changes to Medicare that will affect drug companies. The legislation caps out-of-pocket drug costs for Medicare beneficiaries to $2,000 per year and would allow Medicare to negotiate prescription drug prices directly with drug companies — a move that should reduce drug costs for consumers.

While the goal is to make necessary drugs more affordable, we don’t yet know which drugs qualify for price negotiations. That makes it difficult to predict which companies will be affected and by how much.

While pharmaceutical stocks were negatively impacted by the IRA’s initial announcement of the new prescription drug price, Solita Marcelli, chief investment officer for Americas at UBS Global Wealth Management, wrote in a note to clients in early August that the impact was “manageable.” will be”. from a profit point of view.”

“Lower drug prices will be offset by higher volumes under expanded Obamacare,” wrote Marcelli.

One concern is that lower drug prices could also encourage biotech and large pharmaceutical companies to lower their research and development costs, which could dampen future innovation and slow the introduction of new drugs, Sandven says.