Biden wants to undo Trump's tax cuts. Wall Street is backing him anyway

New York(CNN Business) As the nation's biggest banks prepare to report their latest earnings next week, these titans of Wall Street face a conundrum.

Many financial services executives are supporting Joe Biden over President Trump — even though a Biden win could be a slight negative for the industry.

Deregulation championed by the White House and Congress and low interest rates ushered in by Jerome Powell, Trump-appointed Federal Reserve chairman, have helped fuel a market rally in the past few years that was — at least until Covid-19 hit — very good for bank profits.

But according to a recent analysis from S&P Market Intelligence, Biden's proposed tax plan could lead to a combined $7 billion increase in corporate taxes annually for the nation's top 10 banks.

Executives from JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS) will certainly be asked about the election during next week's earnings calls with analysts and investors.

And other top financial firms, including iShares owner BlackRock (BLK), US Bancorp (USB), BNY Mellon (BK) and State Street (STT), are also on tap to report their third-quarter earnings.

Big banks can shrug off a bigger tax bill

While a tax hike by Biden would hurt their profits somewhat, it may not be a disaster for financial firms.

The S&P analysts noted that a higher corporate tax rate could actually boost bank valuations. That's because many big banks have deferred tax assets that represent future savings which can help offset higher rates. The value of these assets would actually increase if tax rates went up.

What's more, Biden is unlikely to push for a significantly higher corporate tax rate, some experts say.

"With the economy likely still struggling to recover from the pandemic-induced recession...moderate Democrats in conservative states..would push back on a significant tax increase," Isaac Boltansky, an analyst for Compass Point Research & Trading, wrote in the S&P report.

A Biden win could also lead to a slightly higher personal income tax rate for the upper middle class and the wealthy. But you can't look at the tax picture without analyzing what the broader economy might look like with more stimulus coming from either Biden or Trump.

"The strongest banks are going to be able to deal with any change in the tax or regulatory environment. And any new policies that strengthen the middle class should give consumers more confidence to take out more loans," said Elliott Savage, portfolio manager of the YCG Enhanced Fund, which owns shares of JPMorgan Chase, BofA, Wells Fargo and Charles Schwab (SCHW).

More fees should boost bank profits too

How high taxes will be in 2021 and beyond is just one piece of the profit puzzle. For many banks, expectations for continued low interest rates and the outlook for the broader economy are bigger issues.

"Asset managers should do better than commercial banks. Financials that are more dependent on generating interest income from loans will find it more challenging," said Scott Knapp, chief market strategist of CUNA Mutual Group, in an interview with CNN Business.

That's a big reason why many banks are looking to boost their advisory and other fee-generating businesses. Morgan Stanley, for example, announced Thursday it is buying fund manager Eaton Vance (EV) for $7 billion — just days after Morgan Stanley's purchase of E-Trade closed.

Savage added that the top banks also are likely to attract more deposits from consumers in this environment. Leading financial firms are still perceived as safe places to park cash.

"When the world seems scary, you want money in the largest and systemically most important institutions. The strong are getting stronger," Savage said.

The market rebound since stocks bottomed in March should also help the biggest banks. And trading revenue could be higher, especially now that volatility has returned. Plus, the top Wall Street firms also are likely to post solid gains in advisory fees thanks to the boom in IPOs and SPAC deals.

"This quarter should be more impressive than last quarter. Equity underwriting revenue will be a big win thanks to the strong IPO market. There's a better mix of fees," said David Konrad, a bank analyst with D.A. Davidson.

And as long as the broader economy continues to improve, that's good for big banks, too.

"The guidance from the top banks could be more optimistic because the operating environment is less challenging," said CUNA Mutual Group's Knapp.