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Who Really Benefits From The Trump Tax Plan?

Published 28/09/2017, 14:10
Updated 09/07/2023, 11:32

What: President Trump on Wednesday laid out his proposals for a reformed tax system in the US. This sent US blue chip stocks surging to a fresh record high, bond yields rose sharply and the dollar also spiked. However, at this stage the tax plans still need to be passed by Congress, and as such may not see the light of day in their current form, thus the market may be too hasty pricing in a positive effect from these cuts at this early stage.

How: While there are still hoops to jump through, it makes sense to analyse the actual impact from the proposed tax cuts on the various US sectors of the equity market. Interestingly, it could be the small cap stocks rather than the large caps that outperform on the back of Trump’s tax proposals as small companies tend to have lower overseas sales, thus they get more marginal benefit from a cut to the corporate tax rate, which Trump is planning to slash from 35% to 20%.

Chart 1 below shows the ratio between the S&P 500 and the Russell 2000. As you can see, this ratio has dipped recently, suggesting that the Russell 2000 has been outperforming the S&P 500 since the ratio peaked in mid-August. There could be further room for this ratio to decline as we are still some way off the low reached in early December, soon after Trump was elected. Thus, there could be room for more Russell 2000 outperformance vs. the S&P 500 as the tax plan gets more fat on the bones in the coming weeks and months.

Also worth noting is that some sectors of the S&P 500 have been paying a higher effective tax rate than others due to various legal tax loopholes etc. Analysis has found that the tech sector has been paying an average tax rate of approx. 23%, while the energy sector’s tax rate is much higher at closer to 38%. Thus, the energy sector should benefit more from Trump’s tax cut.

Chart 2 below shows Apple’s share price and Exxon Mobil’s share price over the last year, which have been normalised to show how they move together. As you can see, Exxon Mobil’s share price has lagged Apple’s since the start of this year, however, if Trump’s corporate tax cut gains traction in the Senate then we believe Exxon could be poised to outperform Apple’s in the coming months, and a relative value strategy is one to watch.

S&P 500 / Russell 2000

Source: City Index and Bloomberg

Apple (NASDAQ:AAPL) vs. Exxon Mobil (NYSE:XOM) (normalised to show how they move together)

Source: City Index and Bloomberg

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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