The Trump Trade Is at a Moment of Truth as the President’s Tax Proposal Looms

  • Optimism over fiscal stimulus has faded after health bill fail
  • Financial companies and retailers have most on the line

Trump Wants to Cut Corporate Tax Rate to 15%

Traders fixated on the Trump trade are about to get an idea of how far the president will go to stimulate the economy, after months speculating over the timing and size of his tax plan.

The S&P 500 Index jumped to an intraday high yesterday after the Wall Street Journal said Donald Trump urged aides to accelerate a tax plan cutting the corporate rate to 15 percent. The report, citing a person familiar with the matter, followed Trump’s tweet on Saturday that “Big TAX REFORM AND TAX REDUCTION will be announced’’ on April 26.

While budget director Mick Mulvaney said the White House will only offer “specific governing principles,’’ with no details until June, the reaction shows how sensitive investors remain to details of the program.

“The market this year has been baking in little hope of tax reform occurring,” Chris Senyek, a strategist at Wolfe Research LLC in New York, said by phone. “The Trump plan and details behind this, if they’re released, could be a significant catalyst for stocks pushing higher.”

After leading the advance that had added almost $3 trillion to equities since November, companies most sensitive to economic growth such as banks have reversed, turning into losers after the S&P 500 peaked in March. Anxiety over Trump’s ability to enact growth promises has spread since last month’s failure of a health bill to overhaul Obamacare. Here are the industries with most at stake:

1. Financials

Banks and insurers are the biggest beneficiary of tax cuts. According to Bank of America Corp., the industry would see an 18 percent boost in annual earnings should the tax rate fall to 20 percent from 35 percent.

Banks have gained since Trump’s election amid reflation expectations and hopes for tax cuts, with the KBW Bank Index jumping about 20 percent since Nov. 8. The index has declined 7.5 percent since this year’s peak on March 1 amid fading expectations.

2. Companies with Higher Tax Rates

As Trump has suggested lowering the corporate tax rate to 15 percent from 35 percent, a Goldman Sachs stock index of companies with the highest tax rates almost doubled the gain in the S&P 500 from November through mid-January. The advantage for the basket -- comprising 50 S&P 500 stocks with the highest 10-year median effective tax rates -- has since dwindled as optimism over the Trump trade faded.

Phone-services providers and firms that sell consumer necessities have the highest effective tax rates among industries in the S&P 500, company filings compiled by Bloomberg show. Health-care and tech are among those with the lowest tax rate.

3. Retailers

The key issue surrounding retailers is a border-adjusted tax, or BAT, a measure that investors expect to hurt profits for industries that sell goods manufactured overseas. According to a senior administration official, Trump’s plan this week likely won’t include the border tax.

That may be a relief for the industry that’s home to many of the market’s worst-performing stocks in 2017. The S&P Retail Select Industry Index is down 2.3 percent this year, compared with a 6 percent increase in the S&P 500.

More than 95 percent of apparel and footwear bought in the U.S. is produced abroad, say Bloomberg Intelligence analysts Poonam Goyal and Chen Grazutis. A border tax has the potential to wipe away profits for some of these companies.

Also benefiting may be automakers, a group that’s been targeted by Trump for shifting jobs abroad and has voiced concern over BAT.

4. Building and Engineering Companies

While the omission of BAT may be good news for retailers, it’s likely to cast a shadow on companies reliant on Trump’s pledge to rebuild U.S. infrastructure, such as Jacobs Engineering Group Inc. and Eagle Materials Inc. The border tax that House Speaker Paul Ryan has proposed would generate more than $1 trillion in revenue over a decade, helping to pay for Trump’s growth agenda.

Optimism over an infrastructure boom is already fading. After surging 18 percent over the first four days after Trump’s win, the S&P Supercomposite Construction and Engineering Index has made little headway and is down about 6.6 percent from its December peak.

5. Health-Care

Trump’s administration continues to push for a vote this week in the House to replace Obamacare after a lack of support forced it to abruptly pull a vote on an earlier version of a bill. The vote matters especially for hospitals, whose 10 percent gain this year is almost double that of the S&P 500.

Health-care has been in the crossfire of Trump’s policy. While expectations that a Republican-controlled Congress would roll back regulations have buoyed the industry, the president’s attacks on drug pricing have weighed on biotech stocks. Since the election, the president has given conflicting signals on whether he would let the government intervene directly in drug prices to reduce health-care costs.

As Trump’s administration seek sources of new revenue to avoid widening the deficit, tax breaks such those offered for research and development could wind up on the chopping block, according to Bloomberg Intelligence analyst Brian Rye. Companies such as Gilead Sciences Inc., Biogen Inc., Johnson & Johnson and Merck & Co. that take advantage of the R&D tax credit could see earnings hurt.

— With assistance by Felice Maranz, Cristin Flanagan, and Janet Freund

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