Tax reform: Assessing the impact

Key Takeaways:

  • The tax reform framework released in Washington is a starting point for a detailed negotiation of proposed changes to U.S. corporate and personal taxation.
  • We estimate the odds of tax reform success at slightly better than 50/50 over the next three to six months.
  • It is safe to say that nearly every sector will be affected by tax reform, some more than others. Overall, we believe tax reform would be a clear positive for S&P 500 companies’ profits.

The push for tax reform is on—and with it comes significant implications for U.S. equity sectors.

The release of the tax reform “framework” by the White House and Congressional Republican leadership is a starting point for detailed negotiations of proposed changes to U.S. corporate and personal taxation. These talks are expected to grow more heated in the weeks to come. The UBS Office of Public Policy has estimated that the odds of tax reform success are slightly better than 50/50 over the next three to six months.

While we recognize that the framework is still a work in progress, it is safe to say that nearly every sector will be affected by tax reform—some more than others. In a new report, "U.S. equities: Assessing the impact of tax reform (PDF, 279 KB)" CIO Americas, Wealth Management (CIO-A WM) summarizes the likely equity market implications of tax reform and offers a preliminary assessment of the potential impact on S&P 500 sectors.

Overall, CIO-A WM believes tax reform would be a clear positive for S&P 500 companies’ profits. If corporate tax rates fall to 20%, as proposed in the “framework,” earnings could rise by 10%. In addition, possible cuts in tax rates for small businesses and individuals could modestly boost economic growth, driving incrementally stronger top-line results for the S&P 500 companies.

Some insights that can help guide you as you think about your investments in specific sectors include:

  • Lower individual taxes are a likely boon to consumer spending. A reduced corporate tax rate would also be extremely beneficial to retailers.
  • In the energy sector, one area that bears watching is how the reform package could impact oil and gas production in the U.S., which could affect energy prices.
  • In financials, while domestically focused banks and consumer finance companies with relatively high effective tax rates would benefit most, changes in the deductibility of interest expense could negatively impact loan demand, commercial real estate values and credit quality.
  • In the healthcare sector, multinational healthcare companies—pharmaceutical, biotechnology and medical technology companies—could benefit significantly from repatriation of foreign earnings.

Read the report (PDF, 279 KB) for more detailed commentary on these and other sectors.

CIO believes that if tax reform succeeds, markets should enjoy a small bounce, perhaps 3% - 5%, but if tax reform fails, the downside would also appear to be fairly limited. Stocks with the highest tax rates and the largest overseas cash piles relative to market value would stand to benefit most from tax reform success.

Is your portfolio prepared for the possible implications of tax reform? Together we can find an answer. Connect with your UBS Financial Advisor or find one