Amada Agati:  

Hi, everybody, and thanks so much for tuning in to this edition of "#Adding Alpha." Today, we're going to take a quick look at the key components of the recently passed Inflation Reduction Act and share our thoughts on potential implications for markets and investors.

The final version of the bill was dramatically slimmed down from the original $6 trillion-plus that was being contemplated months ago to just $437 billion.

While the impact of the bill on the markets certainly could have been much bigger and more significant based on where the negotiations started, the net effect of this slimmed-down version is still modestly negative for markets in general, given the likely hit to earnings growth next year from tax increases.

The alternative energy industry was by far the biggest beneficiary due to the more than $300 billion in tax credits included in the bill to expand things like wind and solar, subsidies for purchases of electric vehicles, funding for energy-efficient heating and cooling systems, investments in carbon capture and sequestration, even hydrogen investments. The list really does go on and on.

But what's more important than the list itself is the time horizon assigned to these various credits of up to 10 years because it provides much more certainty and a longer runway for capital deployment and development relative to the past. And it's really a positive tail wind for alternative energy producers, as well as the alternative energy industry supply chain at large. In particular, it's a big tail wind for small and mid-size companies in the tech and industrial sectors.

Our back-of-the-envelope calculations suggest that the 15% minimum corporate tax and the 1% tax on buybacks is likely to subtract about 300 basis points from S&P 500 earnings growth in 2023. So instead of the expected 11% consensus earnings growth projection for next year, earnings are likely to come in closer to 8%, all else equal. We estimate about 150 companies in the S&P 500 will be impacted by the tax-law changes. It's certainly a sizable figure but definitely manageable.

We've also had numerous questions from our clients in recent days asking about whether or not the bill is actually going to help reduce inflation. In our view, we'll probably not see much of a benefit in the very short run, but longer term, there definitely may be some disinflationary or deflationary aspects of the bill that can help us address structural inflation. But those investments and the benefits that accrue will definitely take time to work their way through the system. And it's definitely not going to be enough to call off the Fed's monetary policy tightening plans in the near term, either.

We're still in the slowing expansion phase of growth for the economy, and the perfect storm of macro head winds continues to swirl. So adding yet another head wind to growth in the form of higher taxes is definitely not ideal for markets at this point in the cycle. That being said, 9% S&P 500 earnings growth for this year, followed by another 8% earnings growth in 2023, when adjusted for the impact of the bill, is still very solid underlying fundamental strength. While we always watch policy very closely for potential market implications, this is not where the market's attention is focused. And as a result, we really didn't see much market-moving reaction following the passage of the bill.​

The market continues to fixate on two things -- clear signs that inflation has peaked or is rolling over, and the July CPI and PPI reports were the first signs of that possibility, and that the Fed has completed its tightening of financial conditions. In the absence of one or both of these catalysts, we think the high-volatility regime will continue to dominate the summer.