The Tax Cuts and Jobs Act bill that was signed into law on December 22, 2017, after passing the Senate two days prior has been met with approval among U.S. equity investors. The act, which lowered the corporate tax rate from 35%t to 21% gave shareholders a rosy end to what has been an adventurous 2017.
Since the Senate passed the Bill on December 20, the S&P has risen eight of the 11 trading days, climbing 2.1%, making numerous all-time highs on the way. However, lowering the corporate tax rate by 14 percentage points may not be as advantageous as it seems. According to data from FactSet on the effective tax rate over the past 11 years, 375 companies in the S&P 500 currently pay less than 35%, with many of the blue-chips paying less than 30 percent.
|Tax Data of Biggest 5 Companies In The S&P 500|
|Company||Share Price||Change since Dec 20||Median effective tax rate|
*Share price as at January 4
Of the five biggest companies in the S&P 500, four paid less than the 35% tax rate, with Alphabet Inc. (GOOG) paying a median effective tax rate of 21.1%. Since the Senate passed the bill, shares in four of the five have risen by more than the 2.1% gain of the S&P 500. Furthermore, all four have made-all time highs during that period. (See also: Why Bank Of America Sees 2018 Stock Returns Near 20%.)
So while the approval rating of the tax bill among average Americans may be low, you won't see too much complaining from U.S. equity holders. Now with the corporate tax rate at 21%, the question is how low can actual tax rates go, and how effective will the lower (presumably) effective tax rates be in 2018 and going forward?
"Stock Market had another good day but, now that the Tax Cut Bill has passed, we have tremendous upward potential," President Donald Trump tweeted on January 3.