Potential Stock Declines as Investors Engage in Tax Strategies This Year 📉
This year, certain stocks might experience significant downward trends as investors aim to optimize their tax outcomes. According to insights from Morgan Stanley, fluctuations in October have affected the major stock indices—they have seen declines partially due to escalating geopolitical issues and rising oil prices. Yet, when looking back over the course of the year, both the S&P 500 and Nasdaq Composite have appreciated more than 20%. As the fourth quarter gets underway, it is crucial for investors to review their asset performance, deciding which stocks to retain and which ones to sell, particularly underperformers, in an effort to realize capital losses that could help offset capital gains.
The Strategy of Tax Loss Selling 💰
This practice, known as tax loss harvesting, allows investors to minimize their tax burdens for the upcoming year. If an investor’s losses surpass their capital gains, they can use up to $3,000 of those losses to counteract ordinary income on their federal tax returns. Additionally, any excess losses can be carried forward to future tax years. To identify stocks that may be vulnerable to tax loss selling as the year concludes, Morgan Stanley conducted a thorough analysis of the S&P 1500.
- The firm focused on stocks that were highly regarded by Wall Street as of January 16.
- Next, they pinpointed those stocks that had experienced a price drop of at least 10% between mid-January and the end of September.
According to Morgan Stanley equity strategist Michelle Weaver, stocks identified as experiencing tax loss selling pressure have historically underperformed the market. In fact, during October, these stocks tended to lag behind the market average by 178 basis points and trailed their respective sector peers by 114 and 110 basis points, respectively.
Highlighted Stocks Facing Declines 🔍
Among the companies that emerged from the analysis is the software powerhouse Adobe. The company has struggled this year, with its stock down by nearly 17%. Analysts like KeyBanc’s Jackson Ader have expressed a bearish outlook on Adobe, estimating a price target of $450, indicating further potential decline from current prices. The recent forecast for the fourth quarter contributed to concerns, as Ader noted that nearly all business segments shared a less favorable outlook compared to previous projections.
Challenges for Boeing ✈️
The aerospace giant Boeing is another name flagged by Morgan Stanley as likely to face pressure from tax loss selling. This year, Boeing’s shares have plummeted more than 40%. The downward trend began early in the year when a door malfunctioned on one of its 737 Max 9 planes during an Alaska Airlines flight. Further compounding these issues, Boeing has seen a year-over-year decline in deliveries through September, alongside challenges posed by a machinist strike impacting production in the Seattle area.
- Bank of America analyst Ronald Epstein reiterated a neutral stance on Boeing.
- He has lowered his price target from $200 to $170, accounting for various operational challenges and potential future cash flow issues.
The Oil Sector’s Struggles 🛢️
Additionally, Morgan Stanley noted the struggles of Halliburton, a leader in oil services. The company’s stock has decreased by approximately 17% this year. RBC Capital Markets analyst Keith Mackey revised Halliburton’s rating to ‘sector perform’ from ‘outperform’, suggesting that the stock may seem less appealing in comparison to larger peers as the global exploration and production landscape evolves.
Other Identified Stocks 📊
Alongside these prominent names, Morgan Stanley has also highlighted several other stocks that may be subjected to tax loss selling pressure. These include:
- Chord Energy
- Simply Good Foods
- Hilton Grand Vacations, a timeshare operator
As investors navigate through this year, it’s beneficial to stay informed about the potential impacts of tax loss harvesting on underperforming stocks, as they make crucial decisions regarding their portfolios.
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