After the recent Supreme Court ruling against the Environmental Protection Agency, Democrats appear poised to respond with a budget reconciliation plan that could impact health care, clean energy, and corporate taxes.

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Welcome to the Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, July 13th, at 10 a.m. in New York. 

The Supreme Court just finished a busy session, and one of the judgments that investors should pay attention to was for the case, West Virginia vs the Environmental Protection Agency, the EPA. That judgment said the EPA had overreached on some regulations, embracing something called the Major Questions Doctrine, whereby the court suggested regulators should not be using prior legal authority to decide issues of major economic and political significance. Said more simply, the ruling suggests regulators need explicit authorization from Congress rather than just stretching current legal authorization. So the ruling basically punts many of the EPA's climate policies back to Congress for deliberation. 

And that matters for investors because it might be a motivating factor in the Democrats getting their budget reconciliation plan over the finish line. Without being able to rely on the EPA to enact climate policies, Democrats may be willing to compromise more within their own party to get done a package of tax increase funded initiatives on climate and health care. And recent news flow suggests Democrats continue to make progress in this direction. 

So let's break down what's reportedly in this package that investors should be aware of. There's a plan to let Medicare negotiate the prices it pays for certain prescription drugs. That's a fundamental challenge for the pharma sector. But as our pharma team has noted, it's not an existential one. And so the sector could still be an outperformer in a market that needs to further price in the potential for a recession, an environment where defensive sectors like pharma typically do well. 

Also reportedly in the plan is fresh spending on, and tax breaks for, clean energy technologies, a potential demand boost for the clean tech sector which our analysts remain quite constructive on.

But funding that plan is several tax adjustments, including a potential implementation of a corporate book tax, which you can think of as a corporate minimum tax. This could exacerbate corporate margin pressures from inflation in the economic growth slowdown. So while the sectors we just discussed could be outperformers, they would likely do so against the backdrop of a bear market for equities overall. With Congress in session ahead of its August recess, we expect to learn more in the next couple of weeks, and we'll, of course, keep you in the loop. 

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