Can Trump’s tax plan lift stocks even higher?

The big news from overnight was the record high in the Nasdaq, which broke 6,000 for the first time. Tech stocks have had a stunning month with Facebook, Amazon, Netflix and Google (Alphabet), known as the “fangs” all reaching record highs, ahead of their earnings figures due out this week. But, will president Trump’s tax plan boost them further?

The big news from overnight was the record high in the Nasdaq, which broke 6,000 for the first time.  Tech stocks have had a stunning month with Facebook, Amazon, Netflix and Google (Alphabet), known as the “fangs” all reaching record highs, ahead of their earnings figures due out this week. But, will president Trump’s tax plan boost them further?

Trump’s slash and burn tax code

The President is expected to announce his tax plan on Wednesday. Details so far suggest that the centrepiece of the plan will be a slash to the corporation tax rate to 15% from 35% currently. It is unlikely that the President’s blueprint will include measures to fund the tax cut, and the impact on the US’s budget deficit is unknown.

Will Congress back Trump this time?

In theory this tax plan looks like it should extend the rally for US stocks. If taxes are slashed then some large US firms may re-base themselves back in the US to take advantage of the 15% rate, which might encourage them to engage in shareholder-friendly activities such as share buy-backs, larger dividends etc. However, stocks may pause on Wednesday as the market waits for the reaction from Congress who actually has to pass the bill.

The pesky debt ceiling remains crucial problem for Congress

The problem for the Republican -controlled Congress is the debt ceiling, which was breached back in March but has been massaged by some accounting measures until the end of this month. Congress is trying to pass a budget that will fund the Federal Government from 28th April, however, an unfunded tax cut from the Trump administration could add to the pressure on the debt ceiling going forward. Thus, Republicans have to balance their desire to reduce the Budget deficit, with their desire to boost the economy with a large cut to the corporate tax rate. If they do the latter, as many expect, then this could be a green light for US stock markets.

Infrastructure plan, what infrastructure plan?

This makes Trump’s infrastructure plan, which has been suspiciously absent from the coverage of the tax blueprint, very unlikely to go ahead. The Trump team is likely to focus on the fact a tax cut can pay for itself and create jobs, but can it do that at the same pace of a large government-spending programme?

On balance, we expect markets to outperform in the coming days if key members of Congress throw their weight behind Trump’s tax proposals. But, if there are any signs that this won’t get through the US legislature, then we could see big declines for US stocks 

The “tax code rally” could be upon us

Without the infrastructure plan that Trump promised during his campaign, it is hard to see a resurrection of the “reflation trade”, especially now that CPI levels in the US have been falling. The “tax code rally” doesn’t have the same ring to it, however, an aggressive cut to the tax rate could be a key driver for stocks going forward, as long as the plan is not watered down by Congress in the legislative phase.

Trump’s tax plan losers

Looking ahead, there could be some losers from Trump’s tax plan. Already homebuilders have complained that the proposed tax plan is a threat to tax bill deductions from mortgage payments. Thus, not every sector of the S&P 500 may be happy with the outcome from today’s announcement. On balance, we believe that this is good news for the financial and tech sectors in particular, which is probably enough to trigger a decent rally in the near-term at least and we could see fresh record highs for the main US indices in the coming days. Down the road questions will arise about the US’s budget deficit and the ever-rising US debt ceiling, this is a key risk for stocks, but it is not in focus this week.

Macron and ECB to help boost EUR/USD above 1.10

Elsewhere, the latest polls from the French election put Macron ahead by 20 and 21 points, according to two surveys by Ifop. This, along with some expectation that the ECB may ditch its dovish slant at its meeting tomorrow, has helped drive the euro higher, although it has had a bumpy start to Wednesday and is currently at the lows of the day. We expect the euro to take second place to the dollar today as Trump’s tax plan steals the limelight, before coming back into focus later on as we lead up to Thursday’s ECB meeting. We think that the meeting could be euro positive, and may drive EUR/USD above 1.10 with a rhetorical upgrade to its Eurozone growth outlook. However, it may stop short of adjusting its forward guidance on asset purchases at this meeting, instead choosing to discuss the potential to taper its QE programme early at its next meeting in June, when French political risks are out of the way. We will send out a more detailed ECB preview later today. 

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