Lawmakers have made progress on the tax reform President Trump has been pushing for all year, and although they haven’t passed anything yet, some stocks are already benefiting from the 2018 tax reform bill. Other stocks are taking a hit from it, so most are moving in one way or the other, except like in the case of Apple stock, which is holding somewhat heavy thanks to news headlines about the iPhone X.
Retail, financial stocks rally on 2018 tax reform bill proposals
The Senate’s version of the 2018 tax bill overhauls the nation’s tax code and slashes the highest corporate tax rate to 20% from 35%. However, the Senate’s version of the bill will have to be reconciled with the House version before it can be sent to Trump for a signature.
Because the bill deals with U.S. taxes, it stands to reason that companies which earn most or all of their revenue in the U.S. will benefit the most. As Barron’s notes, this generally includes small caps, health insurers and donestic airlines.
One of the biggest beneficiaries from the 2018 tax reform bill is expected to be retail, as companies in the subsector tend to pay the most in taxes versus other companies in the S&P 500. Credit Suisse pegs the retail group’s effective tax rate at 35%, putting it just ahead of telecom at 33.7% and industry services at 32.5%.
Banks and other financial firms are also expected to benefit from tax reform, and financial stocks have by rallying recently. JPMorgan Chase, Wells Fargo and Citigroup each rose by about 2% or more on Monday as financial stocks reached a 10-year high and were the top gainers.
Reuters reports that many fund managers are targeting “buyback” stocks, or companies whose management has said they plan to use any tax savings they see to buy back shares. Goldman Sachs estimates a $75 billion increase in share repurchases next year if the House version of the 2018 tax reform bill passes.
Technology stocks hit hard by 2018 tax reform bill proposals
Multinationals are expected to benefit the least from tax reform, although there is one big area that would make them beneficiaries, and that would be a cut to the repatriation rate. Microsoft, Apple and Alphabet are among the firms with significant holdings overseas, although many technology firms keep most of their cash outside the U.S. for tax reasons. The Senate version of the bill includes a one-time tax repatriation holiday with a 14.5% tax rate for overseas cash brought home.
Additionally, JPMorgan analyst Dubravko Lakos-Bujas warned in a note on Monday that momentum stocks will become much riskier as expected gains from the 2018 tax reform bill are priced in.
Most technology stocks slipped on Monday, with Facebook stock down nearly 2%, Microsoft off by almost 4% and Netflix down by more than 1%. Amazon stock was down by about 2%, and Alphabet declined by more than 1%.
Chip makers and software developers were hit the hardest by the selloff from the 2018 tax reform bill. AMD stock tumbled by more than 6%, while fellow high flyer NVIDIA was off by more than 5%. Macquarie analyst Srini Pajjuri said in a note on Monday that semiconductor firms will likely see limited impact from tax reform. In fiscal 2017, the median tax rate in the firm’s semiconductor sample was only 11%.
Symantec, Adobe Systems, Microsoft, Salesforce, Activision Blizzard and Electronic Arts also slid on Monday.