As 2017 closes out securing another record year for the market, Wall Street remains conflicted over this year’s prospects. At large, while the bears are forecasting an inevitable “market correction,” bulls expect economic drivers, most notably the newly passed GOP tax bill, to send the market past its already nine year run.
The GOP tax overhaul is set to most benefit industries such as financials, retail, healthcare and transportation, as well as companies that currently have a high tax rate. This is a large part of the reason why some of America’s biggest tech titans, who already enjoy a low corporate tax rate, saw an outflow of cash in the last part of 2017. However, companies like Apple Inc. and Microsoft Corp., who store massive amounts of cash overseas to avoid the 35% rate, could gain on billions in freed up savings for spending on things like share buybacks and strategic M&A.
At the same time however, analysts at Bernstein warn investors that the tax plan may actually end up lifting the rate for major tech providers, specifically those offering software and services. International Business Machines Corp, for example could see its normalized tax rate rise from just 15% to closer to 20% or higher, wrote analysts Toni Sacconaghi and Daniel Chen. They added that the legacy tech titan may be forced to make a one-time accounting charge due to a write down of deferred tax assets.
Ultimately, the Tax Cuts and Jobs Act, which slashes the corporate tax rate by 14% to 21%, may seem like a big win for all, but a look closer may not be so exciting for select groups of tech companies.
“Tech has the lowest effective tax rate of any sector [24%] and would benefit the least under the various proposals,” wrote Goldman Sachs right before the bill passed. “Although Tech has the highest expected sales growth and profit margins, it also has the highest risk from tax reform, valuation and government regulation.”