Despite investors’ doubts on tax reform, Wall Street has been buying the stocks of companies that would benefit the most from a tax reforms: ones that currently pay the highest effective rates. Key investors believe that tax cuts have been completely discounted in market valuations, leaving options with great growth possibilities and limited risk. Those same ideas are shared by Goldman Sachs and Deutsche Bank who published lists of the stocks paying the highest tax rates and began buying up their shares.
The Trump administration’s new plan has three key elements: A corporate tax reduction from 35% to 20%, a one-time repatriation tax to facilitate the transfer of cash from abroad to the US, and a change in depreciable investments through immediate write-offs.
Goldman Sachs’ David Kostin argues that every one percentage point fall in the corporate tax rate adds a dollar to expected earnings per share for the S&P 500. The proposed tax cut would be expected to grow the S&P 500’s EPS by 11.5%.
Keith Knutsson of Integrale Advisors mentioned, “major financial institutions still remain skeptical about a successful tax reform, but in terms of risk-adjusted returns the situation could prove itself as an exceptional hedge.”
Additionally, a tax cut could create further shifts in industry and market-cap performance. The tax gap between the top and bottom S&P 500 companies lies at 21% – more than twice as large as in 2002 and the biggest since the last major tax reform in 1986. Industries such as technology (taxed at ~23%) have in the past benefited from a much lower tax rate, while industries such as energy have experienced a tax rate of 38%.