Investors need to look beneath the surface to identify the longer-term winners...
The Tax Cuts and Jobs Act is poised to boost a U.S. economy already running at full capacity. A windfall from lower taxes and incentives for capital expenditure could spur more consumer and business spending and corporate deal-making. A likely convergence in tax rates could create winners and losers, rippling across sectors and companies.
Looking Beneath the Surface...
The overhaul of the U.S. tax code includes supply-side reforms and injects significant near-term demand stimulus into a U.S. economy running at near-full employment. A faster-growing U.S. may accelerate global growth, and result in rising inflation, higher Treasury yields and steeper yield curves.
The tax cuts create winners and losers in the corporate sector. The drop in the top statutory rate will broadly benefit U.S. companies with high effective tax rates. But some of the benefits for these companies appear to be priced in already, suggesting investors need to look beneath the surface to identify the longer-term winners. There is significant dispersion within industries, sub-sectors and companies. The sustainability of increased corporate profitability derived from tax cuts will also vary. Companies in highly competitive industries, for example, will likely see a temporary profit boost that is quickly competed away. Changes to companies’ spending and investment plans because of the tax law are key details to watch through the fourth-quarter earnings season. We expect U.S. global corporations to scrutinize the new tax code’s complex international rules in an effort to manage any rises in their effective tax rates.
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