Wall Street sure loves the tax bill. The Dow Jones industrial average surged past 25,000 for the first time Thursday, a strong signal of investor enthusiasm for President Donald Trump’s $1.5 trillion tax cut. The milestone comes less than a year after the Dow topped 20,000.
“We broke a very, very big barrier,” Mr. Trump said Thursday at the White House. “Every time you see that number go up on Wall Street it means jobs, it means success, it means 401(k)s that are flourishing.”
It’s easy to see why investors like the tax overhaul: Businesses will benefit from a steep cut in the corporate tax rate. They’ll also be able to fully deduct the cost of major purchases from their taxable income, reducing the amount they owe. And companies with large stockpiles of cash overseas can bring the money back to the United States at new, lower rates.
All told, Wall Street analysts estimate the tax package should boost earnings for companies in the Standard & Poor’s 500 index by roughly 8 percent this year.
“All else being equal, this should go straight to the bottom line,” said David Joy, chief market strategist for Ameriprise Financial, a financial services company based in Minneapolis. Improved corporate profits contributed to the market’s gains last year.
Some workers will also share in the benefit: So far, nearly 20 large companies have announced bonuses and higher minimum wages as a result of the tax cut. AT&T, Comcast, Bank of America, and American Airlines have all pledged to pay $1,000 bonuses to their employees.
Investors also appear less concerned than many politicians about how the additional profits will be used. The Trump administration says it expects companies will plow much of the extra profit back into their businesses, purchasing more software, machinery, and other equipment. Those investments will make workers more productive and provide a key boost to the economy’s long-run growth. They should also boost wages and salaries for employees.
Opponents of the tax law respond that companies are more likely to pass the windfall on to shareholders in the form of higher dividend payments and share buybacks, which raise the price of those shares still in investors’ hands. Previous cuts in corporate tax rates, in the U.S. and overseas, haven’t always led to higher wages.
Most analysts take the view that either way, companies and the economy will benefit. Whether businesses pass most of the extra money to workers or to shareholders, consumer spending should increase and lift economic growth.
Some companies and sectors will likely benefit more than others, particularly if they derive most of their income from the United States. Analysts at Goldman Sachs estimate that large banks will see their earnings rise by 13 percent as a result of the corporate rate cut. Wells Fargo will likely see the biggest gain, at 18 percent.
Analysts at Stifel, an investment bank, project that some restaurant chains could see earnings boosts of 20 percent or more, including Chipotle, Wingstop and Domino’s Pizza.
Barclays, another bank, says that technology and pharmaceutical firms, which are already paying lower taxes because they have lots of cash overseas, will see much smaller increases of less than 4 percent.
The legislation’s corporate tax cut is not necessarily as dramatic as it seems, because most corporations don’t end up paying the full 35 percent rate. Barclays estimates that the “effective” tax rate — what companies actually pay — will drop from 26 percent to 20.1 percent.
Joy and other analysts think that most of the money brought back from other countries will go to shareholders, rather than investment. That’s what happened in 2004, when companies were given a one-time low rate on repatriated cash as an inducement.
For much of last year, the stock market’s gains were helped by a synchronized global recovery, with economies from Europe to Asia to Latin America expanding simultaneously for the first time in a decade.
Since November, investors’ anticipation of a tax cut has pushed markets higher, said Keith Parker, an analyst at UBS.
Still, the market’s outsize return, only benefits a narrow slice of the population. According to research by Edward Wolff, an economist at New York University, just 10 percent of the population owns 84 percent of the stock market’s value.
“That benefit won’t accrue to everybody, certainly,” Joy said.