That’s because US markets have renewed pricing in the effects of the proposed cut in the US corporate tax rate from 35 to 20 per cent (analysis from JPMorgan suggests that net earnings for S&P 500 constituents would rise by an average of 8.6 per cent if the US corporate rate was reduced by just 10 per cent). Passage of the tax bills through the Republican-controlled Congress is still far from assured, certainly in an unamended form, leaving the market poised for a potential sell-off. There is continued opposition from fiscal conservatives, along with lawmakers from high-tax states such as California and New Jersey, opposed to plans to curb state and municipal tax deductions (any effective measures on that score would put additional pressure on bond prices in the US).
By midway through this year, US markets had given up some of their post-electoral gains, presumably as investors had grown weary of delays to the Trump administration’s proposals on tax cuts and infrastructure spending. It had become increasingly clear that the new incumbent was facing persistent opposition not only from Democrats in Congress, but also from many in the Republican legislature. However, the beginning of September gave way to renewed appetite for the so-called 'Trump trade', as Congressional support finally appeared to be waxing – only time will tell on that score.
Nonetheless, the Nasdaq and the S&P 500 closed out last week on new record highs on the back of strong earnings data, but also in response to the vote, which opens the way for reforms that would allow multinationals to repatriate (at vastly reduced tax rates) some of the $2.47 trillion in cash currently stashed offshore – a potential boon for shareholders in digital heavyweights such as Apple (US:AAPL) and Google owner Alphabet (US:GOOGL).
The implementation of the corporate tax cuts also stands to benefit UK investors. Analysis from the US Department of the Treasury shows that UK investors account for the second-largest aggregate holding (behind the Cayman Islands) in US equities, with $741bn of the $6.19 trillion held by foreign interests (as at end-June 2016). It’s difficult to assess the potential dollar-value cash savings from the proposed cut as the effective corporate tax rate in the US is obviously lower than the nominal 35 per cent. But based on projections from the Washington-based Tax Policy Center, UK shareholders in US companies might realistically expect a proportional tax saving (and boost to profitability) of $10.1bn annually from the proposals (that’s roughly equivalent to the aggregate distribution from the UK’s top five dividend payers during the third quarter of 2017). And that figure doesn’t factor in any benefits that might flow through from the repatriation of cash currently held offshore by US companies.
All this is potentially good news for investors, but the Trump trade has also served to extend the current US bull run in equities way beyond the historic average. The S&P 500’s ascent hasn’t been interrupted by the 20 per cent decline that would signify a bear market since the first quarter of 2009, marking this run as the second longest bull market behind the one that culminated in the dot-com bust of March 2000.
