GOP Passes Landmark Tax Bill: Best & Worst For Stocks

Jubilant Republicans delivered a tax bill to President Trump before Christmas, as promised. The Republican tax plan got the final approval by the House that gave Corporate America a massive permanent tax break. This in turn will encourage corporations to invest more in the United States, resulting in a rise in wages, jobs and a stronger economy.

While miners, energy, retailers, tech, banks and pharma are expected to enjoy the biggest gains from the tax package, health insurers and hospitals are poised to lose. Needless to say, moneyed Americans like Trump will also make the most of the tax overhaul.

House Gives Final Approval to Tax Bill

The House of Representatives approved the biggest overhaul of the U.S. tax code in 30 years, sending a $1.5-trillion tax bill to the President for signature. The House was compelled to vote again, after it was discovered that the bill they had earlier passed violated some of the necessary rules for Senate Republicans to pass it with simple majority. The House, nevertheless, passed the tax reform bill by 224-201 majority, while the Republican-led Senate had earlier passed it by a vote of 51 to 48.

Republicans successfully countered opposition from Democrats to pass the bill that will slash corporate taxes and provide temporary tax relief to both wealthy and middle-class Americans. The headline-grabbing move was that the corporate tax rate will be lowered from 35% to 21% and will be implemented next year, instead of being delayed until 2019.

Republicans also repealed the 20% corporate alternative minimum tax, while any income brought back from overseas will be taxed 8% to 15.5%, instead of the current 35%. Immediate offset of spending on short lived capital equipment is expected to further save U.S. companies around $32.5 billion in 2018, as per Congress’s joint committee on taxation.

Winners & Losers From the Republican Tax Bill

Among the largest beneficiaries of the tax bill include mining, accommodation and food services that can make use of the allowance for short lived equipment. Levies for repatriating overseas profits will boost major automakers like General Motors Company (NYSE:GM) and Ford Motor (NYSE:F), according to UBS. Meanwhile, the reduction in effective rate will be a shot in the arm for energy players as they pay the second-highest tax rate at 37%, per Bloomberg Intelligence.

For retailers, the bill will be beneficial on multiple fronts. A tax relief among the wealthy and middle-class will increase discretionary income that may boost demand for consumer goods, while big consumer product makers such as The Coca-Cola Company (NYSE:KO) and Pepsico (NASDAQ:PEP) have large cash holdings offshore that can be used for innovation and deal making, noted Bloomberg Intelligence analyst Ken Shea.

One-time low tax rate on foreign profits will also help multinationals including large tech majors to bring funds held overseas back to the United States. Bringing back massive overseas cash pile will help tech companies carry out a combination of share buybacks, pay dividends and M&A activities.

Let us not forget that tech behemoths like Apple Inc (NASDAQ:AAPL). AAPL, Alphabet Inc. (NASDAQ:GOOGL) , Microsoft (NASDAQ:MSFT), Cisco Systems (NASDAQ:CSCO) and Oracle (NYSE:ORCL) 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.

Banks also face a high tax burden, which makes them big gainers when tax rates go down. As per KBW estimates, JPMorgan Chase (NYSE:JPM) , Wells Fargo & Co (NYSE:WFC) and Bank of America Corp (NYSE:BAC) will enjoy a 20% or more hike in profits if the corporate tax rate is cut to 20% (read more: Wall Street Hits Record Highs on Tax-Cut Optimism: 5 Gainers).

American biopharma companies, in the meanwhile, make up one-third of the top 30 U.S. firms with the most cash abroad. A slashed tax rate for repatriated offshore cash, thus, will benefit big drug makers like Amgen Inc. (NASDAQ:AMGN) ($39 billion offshore), Gilead Sciences (NASDAQ:GILD) ($32 billion), Pfizer (NYSE:PFE) (about $22 billion) and Merck (NYSE:MRK) & Co. (about $20 billion), according to a recent Credit Suisse (SIX:CSGN) report.

The report further added that lowering of corporate tax rates will b enefit certain drug makers that pay high effective tax rate and have lower foreign income. The main companies among them are Bioverative (36% effective tax rate), United Therapeutics (37%) and Regeneron Pharmaceuticals (33%).

However, the bill is a mixed bag for health care. Repeal of Obamacare’s individual mandate won’t help health insurers and hospitals. The provision required every American to have health insurance coverage or less pay a fine. Ending of such a provision will reduce the number of people who buy insurance coverage. And for hospitals, a lesser number of insured people mean fewer paying customers.

But, for individual UnitedHealth Group Incorporated (NYSE:UNH) , a drop in the effective tax rate will boost profits by as much as 15%, according Ana Gupte, an analyst at Leerink Partners. The health insurer had payed about 32.5% income tax in the third quarter.

Wind Up: Big Victory for Trump

There is no doubt that passing of the bill is a great victory for Trump, both politically and personally. He had pledged to provide such business-friendly policies since his election years. Such promises have also helped the broader equity markets gain traction and the major bourses hit a series of record highs this year. Further, these measures are likely to help the markets sustain the current bull run heading into 2018.

In addition, a legislative win is beneficial for Trump and his family. Remember, the tax bill trims the ultra-rich individual tax bracket from 39.6% to 37%, while the “pass-through” provision will provide a major windfall to wealthy investors like Trump.

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