Stocks finished September on a strong note and capped eight consecutive quarters of gains as investors cheered long-awaited details on the Trump administrations tax plan.
Tax cuts would likely boost corporate profits and stock prices, and send interest rates higher. Stocks that are sensitive to economic growth would likely benefit, while sectors like utilities and telecommunications that are sensitive to higher interest rates could face headwinds.
A critical question is whether tax reform can be accomplished given the political environment in Washington.
To that end, Strategas Research tracks a basket of stocks that would benefit from lower taxes. After underperforming for most of the year, these stocks have bounced in recent weeks, as investors become more hopeful for tax reform. Likewise, small caps are sensitive to tax reform and have performed better recently.
Accordingly, we believe some version of tax reform will ultimately be passed, although the legislative road will be bumpy. A meaningful tax reform package should elongate what has already been an extended economic cycle. However, it would also risk the economy running hot, setting the stage for higher inflation and tighter Federal Reserve policy.