Judging by the market's euphoric reaction this morning, the Senate's passage of the tax bill on Saturday is nothing but good news for stocks (well, maybe not the Nasdaq). And indeed, banks - whose effective tax rate is around 30% - and other tax-sensitive companies are surging, with banks are outperforming and sending the KBW bank index up as much as 2.8% to a fresh decade-high (BofA up as much as 3.9% to the highest since Oct. 2008; JPM up as much as 3.4% to record high; Citigroup up as much as 2.7% to highest since Dec. 2008). Even so, as Bloomberg reports, some analysts are sounding a few warnings. Their concerns include: a delay in potential benefits; the need to make fixes in a highly partisan environment; and curbing R&D credits.
Here are the negatives in the Republican tax plan, according to Wall Street:
WELLS FARGO (Christopher Harvey)
- Sees difference between House, Senate timing of corporate tax cut (2018 vs 2019) as significant, with Senate’s 2019 likely to prevail; that means tax overhaul’s potential direct impact to 2018 corporate earnings is likely to be zero
- Feels "great rotation" (out of tech, and into tax-sensitive issues such as banks, small-caps, value-oriented stocks) will need to pause
- Senate’s depreciation policy may counterbalance timing of the corporate tax cut to a degree; notes Senate allows for full expensing of capital investments starting in 2018; in a higher tax environment (no change until 2019), that may pull some spending forward, aiding 2018 growth; also sees strong 1H M&A
COMPASS POINT (Isaac Boltansky)
- A "concerning theme" is emerging: the likely need for fixes next year, while "it isn’t exactly clear how those changes will be made"
- Structural defects in final bill are probable, given it’s being drafted at "warp speed," and most pieces of sweeping legislation require technical corrections; recently, however, lawmakers have been unable to reopen primarily partisan bills (like Dodd Frank, ACA)
- Sees conference committee process as potentially volatile, but expects quick movement, with Trump signing a bill this year
BLOOMBERG INTELLIGENCE (Andrew Silverman)
- Downsides include AMT inclusion, which haircuts or prevents some businesses from being able to take deductions and depreciation (including the R&D credit, which GOP had said they wanted to preserve)
- Also notes slashing state and local tax (SALT) deduction; higher-than-est. repatriation rates (bad for tech, pharma cos.); haircut on taking net operating losses
- Senate bill changes how non-profits and pensions are taxed, likely increases taxes substantially on "unrelated business taxable income"
HORIZON INVESTMENTS (Greg Valliere)
- House/Senate conferees, who will start work on Monday, have "enormous number" of issues to resolve, including whether individual provisions are permanent, whether mortgage deduction will get haircut, when corporate rate cuts begin (2018 or 2019?)
- Veteran tax lobbyists were "incredulous" this weekend over Senate-passed tax bill, which was "hastily patched together with enormous unintended consequences," including retaining corporate AMT, which effectively would kill the R&D tax credit
- Adds bill is still being written and corrected; numbers don’t add up; Republican leaders, led by Paul Ryan, "have made no secret about their next goal," which is major overhaul of the welfare state, including curb growth of Social Security, Medicare, Medicaid as deficits rise; "Democrats, eyeing the next two elections, are salivating"
MOODY’S (Nick Samuels)
- Senate’s overhaul is negative for state and local government finances (most sharply in high-tax states like Calif., N.Y., N.J.)
- Change to SALT deduction would reduce disposable income for many taxpayers, likely outweighing positive effect of lower federal rates on consumption
- SALT change would also hurt financial flexibility by increasing political resistance to tax increases at state, local level
MOODY’S (Christina Padgett)
- Diminished interest deductibility, which is more punitive to highly-leveraged companies, is likely to have negative implications for low-rated speculative grade cos., may outweigh benefits of lower corporate tax rate
- Spec-grade companies pay relatively little in taxes in part due to tax shield from interest deduction
- Leveraged buyouts and industry sectors with highest leverage, weakest coverage of interest expense are among most vulnerable
HEIGHT SECURITIES (Ed Groshans)
- Senate-passed bill amends tax law covering interest deductions on home equity indebtedness
- This "seemingly innocuous" amendment would prevent homeowners from deducting interest on mortgages that are refinanced
- Would likely reduce refinancings for borrowers who’d prefer to maintain mortgage interest deduction for tax purposes
MELIUS (Carter Copeland)
- While tax overhaul may bring some extra profits to defense co. bottom lines and cash flow to shareholders, it may also make the future budget situation much tighter for the Department of Defense by removing "wiggle room in the annual fight for funding"