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Traders on the floor react before the opening bell on the New York Stock Exchange on March 9, 2020 in New York.
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Tax reform is the key risk to US stocks through the end of the year, not a slowing economy, according to Goldman Sachs.

As a number of firms – including Goldman Sachs – downgrade GDP growth forecasts for the rest of 2021, concerns about what the softer growth outlook means for stocks have come to the top of investor minds, noted a team of strategists led by David Kostin.

But the price action within the stock market for the last several months reflects the weakening environment, the strategists said. However, "the market appears to be only partially pricing an increased tax rate in 2022," the note reads.

Goldman Sachs estimates that a scaled-down version of the tax plan proposed by President Biden will pass into law. If the government hikes the domestic statutory corporate tax rate to 25% and increase taxes on foreign income, that would reduce S&P 500 earnings by 5%, according to Kostin's team.

On Monday, House Democrats proposed a plan to lift the top corporate tax rate to 26.5%, below Biden's proposed 28% rate.

"As a result of incorporating tax reform into our model, our 2022 EPS forecast is 3% below the bottom-up consensus estimate of $220, which embeds an effective tax rate of 19%, compared with a realized effective rate of 18% since the 2017 tax cuts," they added.

Goldman Sachs said stocks with stable earnings and strong balance sheets should continue to outperform in the uncertain economic and tax policy environment.

Read the original article on Business Insider