Here's how the 'biggest tax cut in history' could impact stocks

There's no denying that President Donald Trump's proposed "biggest tax cut" in US history, which would lower the corporate tax rate to 15% from 35%, will boost cash flow to US corporations and ultimately help their bottom line. That's simple economics.

But will stocks get a commensurate bump up from here? That's where it gets tricky.

After all, the market has already priced in large share gains for companies that pay the most taxes, and would therefore benefit the most from a cut. Look no further than the 50-company basket of highly taxed companies maintained by Goldman Sachs, which has climbed 12% since the election.

UBS thinks it's possible that the investors responsible for these gains have been incorrectly calculating the effect lower taxes will have on corporate profits.

"When assessing the potential benefit of these tax reform proposals the market should not be assessing the beneficial move from 35% to 15%," analysts Geoff Robinson and Guy Weyns wrote in a client note. "This move should be analysed from what was effectively paid — the aggregated S&P 500 effective tax rate is 27.6% — to what will effectively be paid."

While highly-taxed companies may not see quite the relief initially expected, corporations with very low tax rates might be flat-out hurt by Trump's tax plan. The deductions they use may not survive tax reform, which might actually translate to them paying more, UBS said.

Research firm Capital Economics doesn't see the president's tax cut moving stock prices higher at all, at least in 2017.

Source: Bloomberg

Junior Trader Stefan Panteleev

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