Congress has yet to finalize the details of the recently passed tax package, but the general shape of the legislation is in place.
It is a “supply-side” tax cut, aimed at improving Americas attractiveness as a destination for business investment and hiring. The cornerstone of the legislation is write-offs for business investment and a decrease in the corporate tax rate from 35% to the neighborhood of 20%. While many multinational companies have been able to maneuver within the present system to reduce their effective tax rate, many more small and medium sized businesses have been paying the higher statutory rate. Accordingly, we expect the tax cuts to boost corporate profits and capital spending and in turn improve economic growth conditions.
Tax cuts for individuals in the Senate version of the plan are meaningful at $680 billion spread over 10 years, but likely not a game-changer for a $20 trillion economy. This may be just as well from the perspective of the stock market. With unemployment already near generational lows, outsized tax cuts for consumers could cause the economy to overheat and spark inflationary pressures, leading the Federal Reserve to raise interest rates more quickly.
In its present form, we believe the tax package will benefit the following areas of the economy and markets:
- S. companies with high tax rates, particularly economically sensitive small- and mid-sized companies
- Value-style stocks, particularly financials, industrials, and other areas sensitive to increased capital spending
- Companies with large amounts of cash held overseas
- Retail stocks leveraged to consumer spending
- Low tax states
Areas adversely affected by the legislation could include:
- Stocks and bonds of heavily indebted companies due to the reduced ability to write off interest expense
- Economies of high tax states due to a reduction in the state and local income tax deduction
- High-priced Growth stocks with low effective tax rates. We expect investors to rotate away from these companies after several years of strong market leadership
- The federal budget deficit
DISCLOSURE:This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.