Stocktake: Higher tax rates could hurt tech stocks

Rising bond yields are beginning to pressurise valuations, so companies must deliver on earnings for stocks to keep rising. There's good and bad news on that front, says Barclays.

The good news: the percentage of companies beating earnings estimates (73 per cent in Europe, 79 per cent the United States) is near the highest on record. US fourth-quarter earnings grew 6 per cent, compared to pre-season estimates of a 7 per cent fall. European earnings fell 14 per cent, but that was much better than pre-season estimates of a 30 per cent fall. Importantly, companies are upbeat and earnings momentum looks positive.

Vulnerable

The bad news: higher corporation tax is a medium-term earnings threat. Average corporate tax rates in the Organisation for Economic Co-operation and Development have fallen to 22 per cent in recent decades but this could change, with proposals in the US and UK to increase future tax rates.

Tech stocks look especially vulnerable here. Firstly, a global digital tax represents a risk. Secondly, they have historically “managed” their tax affairs and have very low effective rates; consequently, Barclays cautions, they could be the biggest losers in a higher and better enforced corporate tax environment.