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The stock market has seen strong growth in the past year as lawmakers pursued plans to overhaul the tax system and cut rates on corporations.
With the final tax plan now signed into law, market analysts are predicting which companies could see the biggest gains, citing many companies in the retail, banking, and hospitality sectors. Industries likely to benefit from the tax changes include those with income from U.S. sources, such as hotels, and companies that have traditionally paid a higher-than-average effective tax rate, including those in the banking and retail sectors.
Retailers pay an average effective rate of 32.9 percent, banks’ effective rate is 25.4 percent, and hotels pay an average 16 percent rate, according to data compiled in early 2017 by Aswath Damodaran, a New York University finance professor in the Stern School of Business.
Some of the gains tied to tax reform have already been factored into share price, Matt Sommer, vice president of Janus Henderson Investors’ Retirement Strategy Group, said. The S&P 500 index rose nearly 20 percent in 2017.
But there is still growth to come, analysts say, particularly when looking at how the final tax bill will affect specific companies. JPMorgan Chase & Co. and Wal-Mart Stores Inc. are among the corporations that could see large boosts next year.
“Banks are undeniably the biggest beneficiary,” Isaac Boltansky, a policy analyst with Compass Point Research & Trading LLC, told Bloomberg Tax. “It’s not just the rate cut. With increased economic activity, they are going to see loan growth expansion.”
David French, senior vice president for government relations at the National Retail Federation, said retailers are looking at long- and shorter-term growth strategies, such as investing in new stores.
“The markets are looking into the future of what they expect and what they hope,” Rep. Vern Buchanan (R-Fla.) told Bloomberg Tax. “The tax code being more pro-business is driving the markets.”
Republicans say the tax changes will spur capital investment, job growth, and higher wages, because companies will use their extra cash to help workers. Democrats counter that companies will use the savings from lower corporate tax rates and the access to repatriated earnings to buy back stock and increase dividends to benefit shareholders.
Senate Minority Leader Charles E. Schumer (D-N.Y.) pointed to several dozen companies that have made large share buybacks since the Senate passed its version of the tax bill Dec. 2. Among them are Home Depot Inc., purchasing $15 billion, and Bank of America Corp., purchasing $5 billion, according to a statement from Schumer’s office.
Buybacks and increased dividends are good for those invested in the markets, which includes nearly everyone with a retirement account, said Andy Roth, vice president of government affairs at the Club for Growth. Roth said he thinks people are underestimating the effect the tax law will have on the markets. He said there is still room for stock prices to increase.
“This isn’t just a one-year tax bill,” Roth said. “You have at least the next three years with this presidency and an administration that is very business friendly and, unlike previous administrations, there is no boot on the neck of the economy.”
Market analysts are closely watching which companies could see the biggest boost from the tax changes; among them are these noteworthy companies.
Dollar General Corp., Tractor Supply Co., Wal-Mart Stores, and Kroger Co. are expected to benefit from tax reform, Wolfe Research LLC said in a note to investors. These companies could see accelerated growth on higher after-tax income driving consumption while lower taxes on wages encourage labor to work more hours, the note said.
Ulta Beauty Inc. could see earnings per share increases of 20 percent or more over the next two years buoyed by tax reform, Buckingham Research Group analyst Kelly Crago said in a note. Ulta is one of the best positioned retailers to benefit from tax reform, “a largely underappreciated aspect of its story,” Crago said.
InterContinental Hotels could see a 10 percent earnings per share benefit from tax reform in fiscal year 2018, Morgan Stanley analyst Jamie Rollo wrote in a note.
InterContinental said the new tax law will reduce its group effective tax rate by mid-to-high single-digit percentage points starting in January, according to a Dec. 21 filing from the company. The company’s 2017 effective tax rate is expected to be in the low 30s, the company said.
Extended Stay America Inc. is also expected to see an earnings per share boost, Stifel, Nicolaus & Co. analyst Simon Yarmak wrote in a note. The company has also been buying back stock since mid-November tied to loan refinancing, he said.
Banks’ stock prices have risen faster than the market overall since Trump’s November 2016 election, boosted in part by hopes for tax cuts, with banks up more than 40 percent, UBS AG analyst Saul Martinez wrote in a note.
Large banks could see their 2018 earnings increase 13 percent with the corporate tax rate cut, Goldman Sachs & Co. analyst Richard Ramsden said in a note. The increase is partially offset by losing the ability to deduct Federal Deposit Insurance Corp. fees.
Bank of America Corp. could see its earnings per share increase 14 percent, Citigroup Inc.'s could increase 8 percent, JPMorgan's could increase 12 percent, Morgan Stanley's could increase 11 percent, and Wells Fargo & Co.'s could increase 17 percent, the note said.
Buckingham Research Group boosted 2018 earnings per share estimates for financial companies across its coverage area by about 10 percent, analyst James Mitchell wrote in a note.
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