What Stocks Will Win if the Trump Tax Plan Passes Congress?
It's Election Day! I hope you all do your civil duty as an American and get out there and vote today!
As you make your way to the polling stations, please keep in mind the TAX impact on everything and everyone who gets your vote. Why? Because the Trump Administration is looking to reform the US tax code for the first time in over 30 years. The last major change was signed by President Reagan in 1986 and since then the tax code has gone from less than 30,000 pages to over 70,000 pages -- I doubt anyone in Congress has read the whole thing.
We've talked about the potential elimination of the Estate (Death) Tax and what that means for most Americans (in case you didn't read the article, it means nothing for most Americans), but one part we haven't discussed yet is the proposal that corporate America's bottom line will grow dramatically if the corporate tax rate is slashed from 35% to 20%.
Personally, I don't see either of these becoming reality to that magnitude, namely because it would be impossible to eliminate all of these taxes without deficits going completely out of whack.
However, in the unlikely scenario that it passes, there will be winners and losers on Wall Street and regardless of what goes on in the political environment, I'm here to help you make money by pointing out the winners. So today, let's talk about a few of these sectors. You can get more information on these at CNN Money's website.
Winner #1: Tech Titans
Wall Street is literally drooling over this possibility. Major tech companies will be more likely to repatriate cash if the corporate tax rate is slashed. Many large American companies have hoarded nearly $1.3 trillion in cash overseas because there it cannot be subject to US taxes. Once that money is brought back to the United States, it will be taxes at the aforementioned corporate tax rates. The goal is to get companies to deploy more cash to create jobs by building more operations domestically and potentially returning it to investors in the form of dividends and share buybacks.
The top 5 US tech cash hoarders are: Apple (AAPL), Microsoft (MSFT), Google/Alphabet (GOOGL), Cisco, and Oracle (ORCL) -- 88% of all the cash earned by these companies remains outside of the United States.
It's not just tech though: Johnson & Johnson (JNJ), Amgen, Gilead Sciences, Ford (F), Merck and Pfizer (PFE) are also major cash hoarders overseas. As of the end of 2016, according to Moody's, each one is sitting on roughly $25 billion outside the US.
Winner #2: Banks
The major US banks have the highest tax burdens without a doubt, and this will make them huge winners if rates do decline. In fact, according to KBW Research, financials account for roughly 25% of all tax expenses in the S&P 1500 index. Additionally, repatriating all that cash would mean big deposits at the banks and all that cash could see and uptick in M&A transactions, as well as private loans for small businesses. Tax reform may also cause interest rates to rise to post-recession levels (not good if you're a borrower) but major revenues for the banks.
The top winners in banks: JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) would all experience an estimated 20% jump in profits.
Winner #3: High Payers
I'm still talking companies, not individuals here. Companies that tend to pay the highest taxes will obviously benefit more than those who don't pay much to the government. The highest tax-paying sectors of the S&P 500 in 2016 were telecom (33.4%), consumer staples (29.2%) and consumer discretionary (28.5%). In fact, 99 companies out of the 500 in the S&P 500 paid more than 35% in taxes last year.
Winner #4: Small-Cap Stocks
The Russell 2000 is home to small US based companies, and the announcement of these tax cuts have caused that index to soar. We talked about big-everything so far, so why would small stocks benefit? Well the reason is that smaller companies tend to pay more in taxes than larger companies because over time the big guys have developed complex tax-saving strategies (like keeping cash overseas). Due to their size, even a tiny improvement in the tax code will mean major cash flows for them.
As I said earlier, there are always winners and losers on Wall Street, and depending on the tax plan details, there will be some losers created. Firstly, the elimination of local and state tax deductions could be harmful for home-builders and other real estate related companies, especially in high-tax areas like Illinois, New Jersey and New York. Additionally, private equity firms and hedge funds may lose if interest deductions are not addressed.