- The GOP tax reform plan prompted rallies in the two areas of the stock market most sensitive to the proposed measures: highly taxed companies and those with cash overseas.
- After losing confidence in tax reform, investors appear to be swayed in the short term that progress is being made.
The stocks most closely linked to the GOP’s tax plan rallied on Thursday on signs of progress for policies that are expected to boost profits.
These companies can be broken into two main groups: (1) Those who pay the most taxes, and would, therefore, benefit most from a cut, and (2) those with the most cash stashed overseas and would see a huge windfall from a proposed one-time repatriation tax holiday.
That tax plan details were released on Thursday and not delayed further was clearly viewed as a positive sign for investors who have been crouched in wait-and-see mode for weeks.
Here’s a round-up of the action:
Highly taxed companies
A Goldman Sachs basket of 50 companies that pay high taxes, spread across a variety of US industries, climbed sharply around the time details of the GOP tax plan started trickling out. After trading little changed for much of the morning, the index then rose as much as 0.4%.
The chart below shows how Goldman’s high-tax basket has traded relative to the S&P 500. Note that while the line had descended to the lowest level since the election in recent weeks, it climbed on Thursday, indicating outperformance relative to the US equity benchmark.
Companies that hold the most cash overseas
A Goldman Sachs basket of companies that make a large portion of their earnings overseas, and thereby have big foreign cash holdings. The GOP tax plan is designed to have those firms bring cash held internationally back into the US. After trading down as much as 0.6% Thursday morning, the index sharply pared those losses and is now around breakeven for the day.
The chart below shows how Goldman’s high-overseas cash basket has traded relative to the S&P 500. Note that while the line had fallen over the previous week, it climbed on Thursday, indicating outperformance relative to the US equity benchmark.