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Home / Special Reports / US Tax Reform – Are US stocks set to soar?

This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

26 February 2017

US Tax Reform – Are US stocks set to soar?

The past four months has seen one of the most incredible stock market rallies in recent history, as US indices climb higher and higher every day. Not only has the Dow Jones Industrial Average broken through the 20,000 mark for the first time in its history, it is now well over halfway towards 21k. But gains are not limited to the Dow Jones; the blue chip S&P 500 has not seen a daily fall of greater than 1% in over 90 days, while the Nasdaq and small cap Russell 2000 indices have also reached fresh closing and intraday highs numerous times in 2017. What’s more is that this rally can be traced back to a single event in November. The election of Donald Trump.

Now inaugurated, the Trump rally has set off on its second leg as the 45th US President has quickly set about implementing drastic economic policies, the centrepiece of which is his upcoming self-styled phenomenal tax reform which could be implemented by August according to US Treasury Secretary Steve Mnuchin.

Trump hinted that he would reveal his tax plan 2-3 weeks’ time during a 9 February meeting with Airline executives and his upcoming address to Congress on 28 February certainly fits that timeline. Could the President use the primetime platform to make his announcement? Could we see the rally go even further as a result?

This report will break down what is expected from the reform, highlight other policies that could influence US stock markets and analyse 4 key stocks that could react significantly in reaction to Trump’s tax plan. If you feel like you’ve missed out so far on the Trump rally, you certainly don’t want to miss out on the next opportunity!

What could the reform mean for stocks?

Expectations are that Trump will announce several tax reforms including the lowering of both individual and corporate tax rates. His administration will look at easing the tax burden for middle-income earners, while also looking at reducing the US corporate tax rate, which is currently the highest corporate tax rate in the world at 35%. Prior to his election, Trump laid out his plans for his first 100 days in office in which he included a 35% tax cut for a ‘middle-class family of two children’ and lowering the corporate tax rate from 35% to 15%.

Another less touched upon part of the Trump campaign trail tax plan was the renegotiation the 35% tax which US companies currently pay when returning foreign profits from overseas. As a result, US companies have an estimated $2.6 trillion of profits stashed overseas. Trump wants to see a significant portion of that exiled money returned and may look to do so by decreasing the rate of tax to around 10% as he eluded to in his 100-day plan. Trump’s team hopes that the repatriation of that money will create jobs and reward shareholders with greater capital returns (dividends and share buybacks). With the Apple CFO stating that they would increase capital returns if the tax was lowered, could we even see the world’s largest company benefit from the tax reform?

US companies have already seen their shares rocket on hopes that Trump’s team will provide the biggest tax shake up in decades, but could there still be room to run if he were to reduce rates by an even greater amount?

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What else does Trump have up his sleeve?

On the campaign trail, Trump made a series of pledges to boost the US economy through a massive fiscal stimulus, of which tax reform is only one part. The second part of this fiscal pledge is an expected infrastructure investment plan, something the President then reiterated in his electoral acceptance speech. He pledged to spend up to $1 trillion on aging US infrastructure, covering roads, bridges and oil pipelines. While he has made some progress on the latter (signing executive orders to complete two pipelines), as of the week ending 24 February he is yet to formalise those plans. Could we see this announced alongside a potential tax plan?

Another policy pledge made by Trump that has helped the stock market rally was to repeal parts of the Dodd-Frank act, the complicated legislation put in place by the Obama administration to limit risky transactions in the banking sector. Furthermore, the President has already signed an executive order for his team to investigate.

However, some of the President’s economic pledges might not benefit US businesses. During his election campaign, Trump’s rhetoric became increasingly protectionist when it came to global trade, particularly concerning China. Any change to US trade laws could harm importers, which has seen underperformance against their exporting counterparts. Could Trump’s team convince him to take a step back from his anti-China vendetta?

Which stocks have outperformed since Trump’s inauguration?

The below table shows the top 5 Dow Jones winners and losers since Trump’s inauguration ceremony, his election as well as showing how they performed on the day after he won the US presidency.

Far and away the biggest winners on the blue-chip Index are Apple and Cisco, both having rallied in expectation that the aforementioned repatriation tax will be reduced – the FT estimates Apple has $230bn stashed overseas, over 90% of its profits. Also note the performances of JP Morgan and Goldman Sachs since the election, with both having rallied strongly on hopes that Trump will move to de-regulate the banking sector, while the appointment of several former Goldman employees to senior administration positions certainly helps.

Verizon is the standout loser, as investors remain downbeat given that Trump opposes large mergers as Verizon looks to acquire Yahoo!. However, the most surprising name on the list is Exxon Mobil. One of Trump’s first senior appointments was Exxon CEO Rex Tillerson as his Secretary of State, yet the company’s shares have underperformed. Why? US protectionism would greatly impact exporting names, including Exxon and sector peer Chevron, while Intel and General Electric are also likely to be affected. Note, however, all of these stocks (ex-Exxon) have rallied since the election, suggesting investor sentiment remains bullish for US equities.

Over the page, we have picked four of the most exciting US stocks that we think could move significantly once the tax reform is announced, whenever that may be. How do you think the shares of these US giants will react?

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Apple (US: AAPL)

Will Apple rally to fresh all time highs at $140 or pull back towards 2016 lows of $90?
  • Apple’s CFO has said that capital returns would increase if the cash repatriation tax rate was lowered
  • Accelerated uptrend since Trump’s election
  • Jumped significantly upon news of Trump’s imminent tax reform
  • Is the tax reform fully priced in or could Apple shares rally even further?
Broker Consensus: 79% Buy, 19% Hold, 2% Sell

Bullish: Drexel Hamilton, Buy, Target $185, +36% (10 Feb)

Average Target: $143, +4.8% (23 Feb)

Bearish: Rosenblatt Securities, Neutral, Target $102, -25% (17 Feb)

 

Pricing data sourced from Bloomberg on 24 February. Please contact us for a full, up to date rundown.

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Boeing (US: BA)

Will Boeing rally to fresh all time highs of $180 or pull back towards 2016 lows of $120?
  • Has benefitted from Trump’s pro-US manufacturing stance
  • Accelerated uptrend since Trump’s election
  • Is the tax reform priced in fully or could the shares of Boeing rally even further
Broker Consensus: 47% Buy, 39% Hold, 14% Sell

Bullish: Bernstein, Outperform, Target $208, +18% (15 Feb)

Average Target: $174, +1.6% (23 Feb)

Bearish: Goldman Sachs, Sell, Target $124, -30% (26 Jan)

 

Pricing data sourced from Bloomberg on 24 February. Please contact us for a full, up to date rundown.

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Exxon Mobil (US: XOM)

Will Exxon rally to post-Trump election highs of $92 or pull back towards 2016 lows of $72?
  • Concerns that tariffs could be placed on imports has impacted US Oil companies
  • Having initially rallied after Trump’s election, Exxon’s share price has since fallen back
  • Could the shares bounce at 82c support or break down to 2016 lows?
Broker Consensus: 23% Buy, 54% Hold, 23% Sell

Bullish: Societe Generale, Buy, Target $105, +28% (23 Feb)

Average Target: $89, +8.8% (23 Feb)

Bearish: Macquarie, Underperform, Target $72, -12% (3 Feb)

 

Pricing data sourced from Bloomberg on 24 February. Please contact us for a full, up to date rundown.

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Goldman Sachs (US: GS)

Will Goldman rally to fresh all time highs at $260 or pull back towards 2008 lows of $50?
  • Has rallied more than any other Dow Jones company since Trump’s election
  • Accelerated uptrend since Trump’s election
  • Could be further impacted by a possible repeal of the Dodd-Frank Act
  • Is the Trump team’s tax reform priced in already or could Goldman Sachs shares continue to rally?
Broker Consensus: 48% Buy, 45% Hold, 7% Sell

Bullish: UBS, Buy, Target $285, +13%, (6 Jan)

Average Target: $252, +0.3% (23 Feb)

Bearish: Societe Generale, Sell, Target $190, -24% (20 Jan)

 

Pricing data sourced from Bloomberg on 24 February. Please contact us for a full, up to date rundown.

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Want to take advantage of the above opportunities right now?

Whether you see UK Stocks going up or down for the remainder of the year, tradable opportunities will present themselves regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.

CFDs: Like shares, but more flexible

Stockbroking Ticket

CFD Ticket

The example above shows how buying 1,450 shares in British Land @ £6.90 requires an outlay of around £10,000 plus commission (see left-hand box), while the same exposure via a CFD requires about £500 plus commission (see right-hand box). If a trader invests in British Land, one would assume they believe the share price is likely to move in their favour. After considering the ‘worst case scenario’ and assigning funds to cover it, the trader may conclude there’s little point in exposing the full £10,000 to the BLND shares - some of that capital could be put to good use elsewhere in the markets. (Source: IG, Prices indicative)

CFDs are leveraged instruments, but you don’t have to use the leverage

If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure. The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up just £500 (note that overnight financing costs will still apply). The remaining £9,500 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!

What’s your view?

Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios download our ‘Comprehensive Guide to CFDs’ here.

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The Accendo Markets Research Offering

Does your current broker’s morning report tell you all you need to know about yesterday’s news? If so, how is it offering you anything more than the plethora of information already available on the internet?

We’re proud that our morning editorial has become a hot commodity in the City, its content quoted daily by the journalists that are writing the news everyone else will be reading later in the day, if not the next. Our morning report tells you what’s driving the market at that moment and what to look out for in the day ahead.

If a company has reported earnings before the market opens, we’ll tell you why the shares are called to open up or down in relation to that announcement.

As well as the Morning Report, signing-up to Accendo Markets Research & Trade Ideas offers you the chance to receive the following publications:

  • Another Level: A selection of key level alerts on various stocks.
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  • Macro Calendar: Live market-moving data, breaking news as it happens
  • Week in Advance: A summary of next week’s key events. Is there a trading opportunity there for you?

To ensure you can act as quickly as possible, you’ll receive an email with a link to the latest publication as soon as it’s released. You can unsubscribe from these emails at any time.

Based on a wealth of experience, gained from both large and small institutions, our Research and Trade Ideas are produced in-house. Our team of dedicated professionals comprises both analysts and traders, drawing upon a wide range of resources and methodologies.

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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