Wall Street analysts see investment opportunities in the Inflation Reduction Act.
Key details
This week, President Joe Biden signed a climate and health-care law called the Inflation Reduction Act. This type of big-spending legislation is not typically liked by Wall Street, but most analysts seem to favor the act.
The bill includes a $369-billion investment in climate and energy policies, $64 billion to extend a policy under the Affordable Care Act in order to reduce health insurance costs, and a 15% corporate minimum tax aimed at companies that earn more than $1 billion a year. Many see the subsidies to alternative energies as a boost to jump-start these technologies, leading to billions of dollars of growth in the private sector.
Why it’s news
The billions in climate and energy investment will boost renewable energy infrastructure in manufacturing, like solar panels and wind turbines, and include tax credits for electric vehicles and measures to make homes more energy efficient. Democrats say the bill will lower greenhouse gas emissions by 40%.
On health care, the bill enables the federal health secretary to negotiate the prices of some drugs for Medicare. It also caps out-of-pocket prescription drug costs for people on Medicare at $2,000, effective in 2025. The bill also provides a three-year extension on health-care subsidies in the Affordable Care Act that were originally passed in last year’s pandemic relief bill, according to NPR.
What investor don’t like
The $437-billion spending package is expected to raise $737 billion in revenue over the next decade, the biggest share coming from reductions in drug prices for Medicare recipients and tax hikes on corporations. Roughly $124 billion is expected to come from increased IRS enforcement, meaning tougher and more frequent audits for the wealthy.
More of the bills details, according to The New York Times:
- The act, despite its name, is unlikely to lower prices, except for some medications, and may spur inflation for a year or two.
- It increases corporate taxes when bottom-line growth is already slowing.
- According to academics at the Wharton Business School, it may reduce economic growth over the next decade—or at least until its big investment in green energy pays off, if it ever does.
Backing up a bit
The market has climbed nearly 10% since the news of the legislation was announced. Analysts say the reason for the climb was the many positives attached to the bill. The green energy sector is expected to get a big lift from the bill.
At the same time, analysts who follow pharmaceutical companies say the act’s drug price controls are not as strict as the industry feared, and unlikely to significantly dent profits. The same goes for the 1% tax on stock buybacks. Democrats hope the measure will encourage executives to spend more on workers and long-term investments, though financial analysts are skeptical, reports The Times’s Joe Rennison.
“We don’t think it will make a large difference,” says Goldman Sachs equity strategist Ben Snider.
This legislation comes amid analysts’ hope for inflation reduction. The key measure of inflation dropped slightly last month, after months of increases. The stock market has been helped by other factors such as lowering gas prices, as well.
But the reaction could just be another signal that investors are too optimistic about stocks. There are certainly signs of froth in the market, reports The New York Times.