Regardless of who wins November’s general election we expect higher corporate income tax rates in 2021 or more likely 2022. Today’s 21% U.S. corporate tax rate will likely climb back to 35% or higher should Trump win re-election or to 40-45% should Biden win the Presidency. We expect companies to control expenses as a result primarily by leveraging AI and related technologies to automate workflows.
Charts & Companies: Federal Taxes On Corporate Income; Corporate EBIT; Private Pension Equity Flows; Venture Capital AUM by State; Private Equity Investors Across North America and Europe; and Real GDP Outlook 2020-2030. Company list at end of article.
The Taxman Is Coming
Many companies will enjoy modest operating profit growth in 2022 over 2021. However, a portion of that incremental profitability won’t find its way to the earnings line. It will not be paid as dividends nor used for M&A or share repurchases. The Federal Government will collect it as tax revenue.
P/E Multiple Contraction and Asset Class Rotations Are On The Horizon
P/E multiples will likely contract based on: 1.) news of higher corporate income tax rates, 2.) many institutional clients will likely rotate a portion of their investment allocations out of public equities and into private equity and other alternative asset classes where valuations likely will not be marked down as severely if at all. Private Equity and venture-backed companies are somewhat sheltered from public market volatility until they issue public debt or equity. These companies can wait out volatility for a period and may tap public markets when valuation multiples are favorable.
Private Equity and Venture Capital Funds Will Benefit
Companies Will Accelerate Investment in Artificial Intelligence to Drive Automation
Public companies will work diligently to control expenses through AI-powered automation. Employees are the largest corporate expense and we expect companies to accelerate investment in Artificial Intelligence and related technologies to automate workflows in an effort to control expenses. These efforts will extend beyond customer service workflows, automated marketing campaigns, employee recruiting and the like and touch any workflow that may be automated. Examples include financial close workflows, fraud detection, healthcare diagnostics, payroll processing, tax preparation, benefits administration, software testing, chip design, capital allocation, you name it. AI, machine learning, RPA and other tools to automate workflows are abundant. Some of these companies include: ADP (tkr: ADP), Alteryx (tkr: AYX), Ansys (tkr: ANSS), AWS (tkr: AMZN), Azure (tkr: MSFT), DataRobot (PVT), GCP (tkr: GOOG), Intuit (tkr: INTU), Kronos (PVT), Oracle (tkr: ORCL), Pegasystems (tkr: PEGA), Salesforce.com (tkr: CRM), SAS Institute (PVT), SS&C Technologies (tkr: SSNC), and Verisk (tkr: VRSK) to name a few.