Over the summer I had the opportunity to visit Newport, Rhode Island. Talk about an incredible place to visit! I was struck by the amazing mansions lining the Cliffside ocean vistas. The over-the-top architecture combined with no-holds-barred luxury appointments were truly a sight to behold.
This Disneyland of the Gilded Age wealthy is a testament to the money-making prowess of the Vanderbilts, Mellons, Hunts, and many other ultra-high net worth families.
Contemplating why all this extreme wealth was created during a relatively short time in American history led me to two primary triggers.
The first was the initial explosion of growth in the new U.S. economy. The infrastructure for our nation was being laid, and these families owned businesses that significantly contributed to that growth.
Second, taxation and regulation didn’t stand in their way. Remember, there was no income tax and very limited regulations during the Gilded Age. This fact enabled the wealthy to plow their profits back into their businesses and personal pursuits, creating jobs and opportunities for millions of citizens.
This history lesson illustrates the incredible power taxation and regulation have on the economy and personal wealth creation.
We recently witnessed the election of a new President in the United States. This new administration has aggressive plans to revamp our nation’s tax structure and business regulations to benefit both businesses and individuals.
These Plans Are Great News For Stock Market Investors
Not only should the overall stock market react positively to a lower tax environment, but I have also identified five specific stocks that are set to thrive under the new regime.
Now, make no mistake, I am not suggesting that the Trump presidency will usher in a new Gilded Age.
However, his taxation policies combined with a loosening of some regulations will likely ignite an economic growth trend not seen for many years in the United States.
Here’s a closer look at what to expect.
According to Trump’s campaign website, his plan will lower the business tax rate from 35 percent to 15 percent, and eliminate the corporate alternative minimum tax. This rate is available to all businesses, both small and large; that want to retain the profits within the firm.
It will also allow for repatriation of corporate profits held offshore at a one-time tax rate of 10 percent.
In addition, it eliminates most corporate tax expenditures except for the Research and Development credit.
Firms engaged in manufacturing in the United States may elect to expense capital investment and lose the deductibility of corporate interest expense. An election once made can only be revoked within the first three years of election; if canceled, returns for prior years would need to be amended to show revised status. After three years, the election is irrevocable.
These changes to the tax code may add an impressive 9% to the overall earnings of the S&P 500, per Citi Research.
Citi Research strategist Tobias Levkovich explained to CNBC, “Tax cuts could be quite stimulative to S&P 500 EPS“.
He continued to explain that even if the, “corporate tax rate is reduced to just 20 percent from the current effective rate, it would add $12 to my 2017 S&P 500 earnings-per-share estimate of $129, an increase of 9.3 percent.” He also explained that Trump’s proposed $1 trillion of fiscal stimulus would be a “significant number” for the $16 trillion U.S. economy.
Remember, no changes will take place until after the new Congress is sworn in on January 3 and the new President takes office on January 20.
Here’s where tax cuts will drive growth…
The most obvious sector that stands to profit from the changes is the banking sector.
When Trump took office, the Financial Sector SPDR ETF (XLF) exploded on the upside. At the same time, large banks like Bank of America Corp (BAC) and JP Morgan Chase & Co. (JPM) both exploded higher, staging the strongest rally either have experienced in years.
While lower taxes are beneficial to banks, the real reasons behind the rally are the potential overturn of the Dodd-Frank Act, greater infrastructure spending, and the steepening of the yield curve, which are all very beneficial for banks.
The lower corporate taxes will naturally help those firms who pay the most currently. A report published by JP Morgan categorized companies based on their five-year effective tax rate.
Here are the top five highest tax paying companies per the report:
— CVS Health Corp (CVS), Tax rate 39.1%, P/E 12.8
— Dollar General Corp. (DG), Tax rate 39.1%, P/E 12.8
— AutoNation, Inc. (AN), Tax rate 38.4%, P/E 9.9
— J B Hunt Transport Services Inc (JBHT), Tax rate 38.2%, P/E 21.4
— Public Service Enterprise Group Inc. (PEG), Tax rate 37.3%, P/E 14.1
Risks To Consider: Only time will tell about the effectiveness and success of the Trump presidency. Turning the rhetoric into action while maintaining stability will take the united effort of everyone involved. Always be certain to consider all the company’s metrics before making an investment decision.
Action To Take: Consider the potential changes in regulation and taxation when choosing investments for the long term.
Editor’s Note: Can ‘free-tirement’ save your golden years? It’s the retirement loophole of a lifetime. It could boost your income by 200% and give you a tax-free retirement,right here in America. See full details here.
StreetAuthority’s mission is to help individual investors earn above-average profits by providing a source of independent, unbiased — and most of all, profitable — investing ideas. Unlike traditional publishers, StreetAuthority doesn’t simply regurgitate the latest stock market news. Instead, we provide in-depth research, plus specific investment ideas and immediate action to take based on the latest market events. Visit us at StreetAuthority.com.