Inflation Reduction Act: Stock Market Winners and Losers

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On Tuesday, President Joe Biden signed the monumental Inflation Reduction Act (IRA). While the sweeping initiative is focused on climate policy, health care and taxes, investors should be aware there are definitely implications for stocks — with some parts of the market likely to benefit big time.

The IRA aims to reduce the cost of prescription drugs, health care premiums and energy for millions of Americans. While it probably won’t actually lower inflation, as the name might suggest, the law could certainly have a broad economic impact, as it touches on everything from the climate crisis to taxes on corporations.

The financial markets started reacting to the legislation long before it went to Biden’s desk. The stock prices of fuel-cell company Plug Power and solar energy company SunPower, for example, have jumped more than 50% since Sen. Joe Manchin III of West Virginia said at the end of 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 still have room to benefit, while others may be hurt. Here 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 towards energy security and includes clean energy and electric vehicle tax credits.

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

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

Companies that focus on residential solar, hydrogen power, energy storage and domestic manufacturing could get a boost from the legislation, with the three top potential beneficiaries being SunPower, First Solar and Plug Power, Sekera adds.

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 off overtime, especially with the changes included in the IRA, says Michael Becker, associate wealth advisor at Hightower Wealth Advisors .

“If you’re entering the space now, there are likely challenges,” Becker says. “But if you’re a long-term investor, you will definitely see a return on solar in the future.”

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Electric vehicle makers

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

A lot of the electric car companies will likely benefit, says Mychal Campos, head of investing at online investment advice company Betterment. But not all will benefit equally.

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

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

As Morningstar equity strategist Seth Goldstein pointed out in a recent market update from the firm, the entire EV supply chain should benefit. That includes lithium producers, as lithium is a crucial element in the batteries that power most EVs.

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

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Materials, industrials and utilities companies

The energy-related inclusions in the law could help businesses in the materials and industrial sectors as well, Sandven adds.

“If this act results in energy prices to go lower, energy is a key input cost to companies within the materials and industrial sectors, which should help boost overall profit margins overtime,” he says.

This could positively impact utilities companies to a degree as well, Sandven adds.

Market losers of the Inflation Reduction Act

Giant tax-avoiding companies

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

That’s going to have a negative impact on the multinational firms that are paying lower tax rates right now as their bottom line could be lower, says David Wagner, portfolio manager at Aptus Capital Advisors. But experts say relatively few companies will actually be impacted.

According to a report published in April from 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 US companies that enjoyed effective tax rates of less than 10%, authors of the report wrote.

Shareholders of companies doing buybacks

The new legislation includes a 1% tax on stock buybacks, which occur when a company buys shares of its own stock on the open market. Buybacks allow companies to improve their own stock price by decreasing the number of shares available to the public. When the amount of stock held by shareholders on the public market decreases, the ownership stake of the shares that are on the public market should go up — along with the share price overall.

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

But it could hurt shareholders, too.

“Shareholders of companies that pursue stock buyback programs could be losers under the Act since they will ultimately bear the burden of the 1% tax” on stock buybacks, Greg Bassuk, CEO of AXS Investments, tells Money via email.

On the flip side, this could benefit dividend stocks, Wagner says. (A dividend is a certain amount of money regularly doled out to shareholders from a company’s profits.)

The tax on stock buybacks could make paying out dividends more tax efficient for companies than buying back shares, he explains. If more investor money is going towards dividend-paying stocks instead of buybacks, the dividend stocks could outperform; it’s a supply-demand imbalance, Wagner adds.

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Drug companies

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

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

While pharmaceutical stocks were affected negatively on the initial announcement of the IRA’S new prescription drug pricing, Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, wrote in a note to clients in early August that the impact “will be manageable from an earnings perspective.”

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

One concern is that lower drug prices could also push biotechnology and big pharma companies to reduce their research and development costs, which might dampen future innovation and slow down new drugs being introduced, Sandven says.