President Trump’s plans of massive tax cuts and reforms cleared a critical hurdle with the Senate passing a budget blueprint of trillions of dollars for fiscal 2018. This has paved the way for the Republicans to pursue the much awaited tax-cut reform without Democratic support. After all, both American households and corporates have borne the burden of an unfair tax code for quite some time.
The Trump administration’s initiative to cut tax rates will put more money in individual’s pockets, while it will be a shot in the arm for financial as well as tech majors that have parked a lot of cash overseas. The cash held overseas will be brought back to avail the lower domestic rate, prompting a slew of new deals. This in turn will fuel innovation, organic growth and earnings.
Repatriation of billions of dollars also strengthens the economy causing the federal funds rate to move north, which bodes well for both banking and non-banking financial organizations. Thus, let us invest in multinational financial and information technology service providers, as well as computer makers that can make the most from the lowering of corporate tax rate.
Senate Republicans Push Through Budget Proposal
Senate Republicans successfully passed a $4-trillion budget blueprint in federal outlays by a 51-to-49 vote. The Republican-controlled Senate approved the budget measure, with GOP senator Rand Paul of Kentucky voting against it. This has set the stage for Republicans to begin ‘once-in-a-generation’ opportunity to overhaul an outdated U.S. tax code as early as this year, providing financial relief to families and making American businesses globally more competitive.
After repeatedly failing to repeal the Affordable Care Act this year, the GOP lawmakers were under tremendous pressure to deliver on tax reforms that they had promised in the election campaign. The Senate’s passage of the budget blueprint has unlocked a special parliamentary procedure that will help Republicans cut $1.5 trillion in taxes with just 50 votes. A typical Senate procedure requires 60 votes to bypass the threat of a filibuster.
Senate majority leader Mitch McConnell supported the budget and said that it was “critical to getting tax reform done;” while President Trump added that it is “an important step in advancing the Administration’s pro-growth and pro-jobs legislative agenda.”
President Trump, in the meantime, had a tough message for House Republicans. They need to work on the tax reform and pass the Senate’s budget this week or face bloodbath next year. House Speaker Paul Ryan had already told his members that he wants tax reform enacted by this year, and approving the revised Senate budget this week gives the best shot to get it done within that timeframe.
Banks Set to Gain From Trump’s Sweeping Tax Cuts
It’s no wonder that bank’s profitability will be enhanced by the proposed tax cuts. The corporate tax rate is expected to be slashed from 35% to 20%. Banks face high tax burden, which makes them big gainers when tax rates go down. As per KBW estimates, JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Co (WFC - Free Report) and Bank of America Corp (BAC - Free Report) will enjoy a 20% or more hike in profits if the corporate tax rate is lowered to 20%.
The slashing of domestic tax rate will also result in repatriation of hundreds of billions of dollars in cash. This will, ultimately, boost the economy and may cause interest rates to rise. Higher interest rates boost bank profits by increasing the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
Non-banking financial institutions including insurance companies, asset managers and brokerage firms should also benefit. Rising rates act as a boon for insurance companies as they derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a hike in Fed fund rates and bank interest rates. This enables life insurers to invest their premiums at higher yields and earn more, expanding their profit margins. Not only investment income, which is an important component of insurers’ top line, annuity sales should gain from a higher rate environment.
Brokerage firms and asset managers also advantage immensely from a rising rate environment since an increase in rates generally concurs during periods of economic strength and upbeat investor sentiments.
Tech Stocks Could Make Billions From Trump’s Tax Plan
Tax cuts will make tech majors bring funds held overseas back to the United States. This will encourage such companies to carry out a combination of share buybacks, pay dividends and get involved in M&A activities.
Let us not forget that tech behemoths Apple Inc. (AAPL - Free Report) , Alphabet Inc (GOOGL - Free Report) , Microsoft Corporation, Cisco Systems, Inc. and Oracle Corporation hold 88% of their money overseas to avoid paying the 35% corporate tax rate on earnings. Thus, they are positioned to gain immensely under Trump’s tax reduction plan. Companies like Hewlett Packard Enterprise Co and QUALCOMM, Inc.’s earnings are also projected to rise around 20.8% and 10.5%, respectively, on a repatriation tax cut, per Strategas Research Partners.
Top 5 Gainers
Banking on such positives, investing in sound multinational companies from the aforesaid sectors will be a prudent choice. We have, thus, selected five companies that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Morgan Stanley (MS - Free Report) provides various financial products and services to corporations, governments, financial institutions, and individuals in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 2.6% over the last 60 days. The company’s expected growth rate for the current year is 21.7%, higher than the industry’s gain of 8.8%.
Principal Financial Group Inc (PFG - Free Report) provides retirement, asset management, and insurance products and services to businesses, individuals, and institutional clients worldwide. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings advanced 0.4% over the last 60 days. The company’s expected growth rate for the current year is 14.6%, more than the industry’s rally of 8.6%.
Manulife Financial Corporation (MFC - Free Report) provides financial advice, insurance, and wealth and asset management solutions for individuals, groups, and institutions in Asia, Canada, and the United States. The company has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 8.6% over the last 90 days. The company’s expected growth rate for the current year is 20.3%, higher than the industry’s gain of 13.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
DXC Technology Company (DXC - Free Report) provides information technology services and solutions, primarily in North America, Europe, Asia and Australia. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 0.4% over the last 60 days. The company’s expected growth rate for the current year is 120.7%, better than the industry’s growth of 5.7%.
Micron Technology, Inc. (MU - Free Report) offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications. The company has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings rose 26.3% over the last 60 days. The company is expected to yield a solid return of more than 50% this year.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
See This Ticker Free >>