One of the central economic promises of President Donald Trump’s young administration is a large corporate tax cut. But according to a note from the equity-analysis team at Jefferies, Wall Street isn’t buying that it’s coming anytime soon.
The Jefferies team says stumbling blocks such as divisions in the Republican Party over healthcare reform and recent reports about the possible tax plan from the Trump administration should inspire a healthy dose of skepticism.
“It doesn’t require copious research to conclude that tax reform will be challenging to pass,” the note said. “Disagreements over Border Adjusted Tax, the failed Healthcare Reform bill all point to a steep road ahead.”
According to the Jefferies team, there is also a simple way to see that investors are discounting the possibility of a large tax cut coming anytime soon.
“We looked at the S&P 1500, divided it into sectors and then quintiled each sector by tax rate,” the note said. “If investors had been piling in to tax reform beneficiaries, you’d expect the high tax rate companies to have performed best, but just the opposite has happened – low tax rate companies have not only outperformed, but those companies have performed better than any other quintile.”
Put another way, stocks of the companies with the least to gain from tax reform have performed the best since the election, and those that have the greatest to gain have performed the worst. Additionally, the divergence between the two has recently increased since the legislative faltering over the American Health Care Act, Republican leaders’ failed bill to repeal and replace the Affordable Care Act.
Given the recent news around tax reform, it isn’t hard to see why.
Trump repeatedly promised during the campaign to slash the federal tax rate to 15% from 35%. Since the election, however, Trump’s plan has hit a few stumbling blocks and undergone a few revisions.
Trump first told manufacturing CEOs on February 9 that he was lowering the tax rate to between 15% and 20% instead of a hard 15%. But that depended in part on the AHCA, which some believed would have made it easier to lower the tax rate.
Then, Andrew Ross Sorkin of The New York Times reported on March 28 that the Trump administration was working off 20% corporate tax as its base for any reform plan and was considering a rate as high as 28% after the AHCA misstep.