Feeding the Bull: Tax Bill Pushes up Key S&P, Dow Sectors

2017-12-04 | Simpler Trading Team

The Republican-controlled Senate finally managed to come together to pass a tax overhaul this past weekend. If the House and Senate can reconcile their separate versions of the bill, the result would be $1.4 trillion in tax cuts. But even before a final bill finds its way to the White House, there are some clear winners … In the stock market, at least.

After plunging down to end the week following Michael Flynn’s legal dramas, the Dow and S&P set new records as expectations of corporate tax cuts were realized. The bill would slash corporate tax rates from 35% to 20%, theoretically boosting both hiring and pay.

And while the markets as a whole were extremely happy, there were some clear winners here.

Banks

Big name banks such JPMorgan Chase & Co. (JPM), Citigroup (C), and Wells Fargo & Co. (WFC) all saw share prices rise on the news. With promised faster economic growth comes loan portfolio expansion. As corporations find themselves with lower tax rates, many will look to take on more loans and expand their operations, which boosts banks in a big way.

In addition, banks will benefit from a key provision to the base erosion anti-abuse tax (BEAT) stating that payments involving derivatives would no longer count towards the BEAT. Combined with lower tax rates for the financial institutions themselves, banks look like the clear winner in the tax reform bill.

Oil and Gas

For starters, the Fossil Fuels sector will benefit from the corporate tax cut more than other industries because of the recent struggles the industry has experienced. But more than that, the Senate plan opens part of Alaska’s Arctic National Wildlife Refuge to oil and natural gas drilling. That move could produce more than $1 billion in revenue over the next decade according to lawmakers. Plus, to boost revenue in the short term, the tax overhaul may also increase sales from the Strategic Petroleum Reserve. The Senate’s bill also fails to repeal the corporate alternative minimum tax, making Oil one of the bill’s biggest winners.

Technology

The tech industry comes out as a big winner if a bill passes. Both the House and Senate versions have provisions for a repatriation tax. Most of the big tech giants have more than 90% of their total cash overseas. For Apple, Inc., that number comes to more than $252 billion, with more than $3 trillion in total assets overseas for the industry as a whole. A one time repatriation tax would allow the companies to bring all their capital back to the U.S. for a fraction of what they’d normally pay in taxes, saving tech companies hundreds of billions of dollars. The opportunity to drastically expand their domestic war chests at home makes tech companies a big winner in tax reform, regardless of which version is passed.

Pharmaceuticals

With the corporate tax rate being slashed 15%, drug and biotech companies are expected to become extremely active. While many industries will look to expand operations and increase both hiring and worker pay, the pharmaceutical industry is expected to use the lower tax rate for shareholder buybacks and dividends. And with billions more with which to work, the pharma industry should explode in a flurry of mergers and acquisitions.

Other sectors that look to come out on top in the Senate’s tax reform include telecom, industrials, and the retail industry.

But not all sectors were winners with the Senate’s reform. There was one notable loser…

Healthcare

The biggest effect the Senate’s bill has on the healthcare industry is the repeal of Obamacare’s individual mandate. With Republicans being vocal about plans to repeal and replace the Affordable Care Act, healthcare has come under fire. Now, with no mandate, hospitals will still see the same (or more) number of patients, but significantly more of them will be without insurance. The patients who will buy insurance are the ones who need it most. These patients are far more costly and demanding on hospitals. This means that hospitals will have to write off their unpaid bills as losses, making healthcare arguably the bill’s biggest loser.

There are vocal advocates and critics of the bill on both sides of the aisle. Whether the theoretical benefits of a corporate tax cut (such as increased hiring and higher employee pay) materialize, the stock market looks like the bull is being fed.

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