There’s no denying that President Donald Trump’s proposed “biggest tax cut” in US history, which would lower the corporate tax rate to 15% from 35%, will boost cash flow to US corporations and ultimately help their bottom line. That’s simple economics.
But will stocks get a commensurate bump up from here? That’s where it gets tricky.
After all, the market has already priced in large share gains for companies that pay the most taxes, and would therefore benefit the most from a cut. Look no further than the 50-company basket of highly taxed companies maintained by Goldman Sachs, which has climbed 12% since the election.
UBS thinks it’s possible that the investors responsible for these gains have been incorrectly calculating the effect lower taxes will have on corporate profits.
“When assessing the potential benefit of these tax reform proposals the market should not be assessing the beneficial move from 35% to 15%,” analysts Geoff Robinson and Guy Weyns wrote in a client note. “This move should be analysed from what was effectively paid — the aggregated S&P 500 effective tax rate is 27.6% — to what will effectively be paid.”
While highly-taxed companies may not see quite the relief initially expected, corporations with very low tax rates might be flat-out hurt by Trump’s tax plan. The deductions they use may not survive tax reform, which might actually translate to them paying more, UBS said.
Research firm Capital Economics doesn’t see the president’s tax cut moving stock prices higher at all, at least in 2017. They had a year-end price target of 2,300 on the S&P 500 heading into the tax plan announcement, and are sticking by their forecast, which calls for a 3.7% slide from Wednesday’s close.
Their indifference to the plan was echoed by stock traders, who barely budged after it was unveiled, even paring some gains.
“On the assumption that only a modest tax reform is enacted rather than the ‘phenomenal’ one the president has pledged, we are sticking to our view,” John Higgins, chief markets economist at Capital Economics, wrote in a client note. “The size of eventual tax cuts is therefore likely to be much smaller than Trump and the House Republican leadership is proposing, which we have factored into our current economic and market forecasts.”
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