Investors buy heavily into US shares in wake of Senate’s passage of package of big tax cuts for corporations and high earners
Shares on Wall Street have hit record levels as financial markets around the world anticipate the biggest package of US tax cuts since Ronald Reagan was in the White House in the 1980s.
Investors bought heavily into US stocks after Donald Trump received approval from the Senate for reforms that offer the biggest reduction in taxes to corporations and those on high incomes.
Both the Dow Jones industrial average and the more broadly based Standard & Poor’s 500 hit record levels in early trading but later fell back because of a sell-off of technology stocks, which have seen substantial price rises this year. But there was heavy buying of telecom, bank, financial and other shares in sectors seen as benefiting from the tax cuts – the centrepiece of Trump’s economic strategy.
The technology sector is expected to benefit less because it already enjoys low tax rates.
Although the final details of the package have still to be finalised through an agreement between the Senate and the House of Representatives, Wall Street believes that the president has finally succeeded in a near year-long battle to get Congress to support his plan.
The Dow Jones closed just 58 points up, while the S&P 500 was 0.1% down. The latter has risen about 18% since the start of the year on strong corporate earnings, economic growth and confidence that Trump would eventually get his tax cuts.
Markets have shrugged off concerns that the cuts, like those in the 1980s, will lead to a ballooning of the US budget deficit. Mickey Levy, chief US economist at Berenberg, said he had revised up his growth forecasts for the world’s biggest economy to 2.9% in 2018 and to 2.7% in 2019 as a result of the likely boost from the tax cuts.
James Knightley, chief international analyst at ING bank, said the tax cuts would provide a fillip to US growth but added that a degree of scepticism was warranted. Knightley said the main beneficiaries of the personal tax cuts would be the top 1%, since the threshold for paying the top rate of income tax would more than double to $1m a year.
Trump is proposing a cut in corporation tax from 35% to 20%. The cut could encourage US corporations to repatriate hundreds of billions of dollars in profits they have stockpiled overseas rather than lose a large slice of them to the US tax authorities. Five big US tech companies – Apple, Amazon, Microsoft, Google and Facebook – alone hold some $450bn overseas. However, Knightley said the effective rate paid by most companies was significantly lower than 35%, due to exemptions and credits.
“In terms of the boost from income tax cuts, the Tax Policy Centre estimates that the top 1% of taxpayers would get 21% of the benefit in 2018 and 50% by 2027,”Knightley said. “While people on lower incomes would also on average see a positive impact on their finance,s this all suggest that the boost to consumer spending may not be great.”
On the currency markets, the pound lost all its early gains as it became clear that there had not been a decisive breakthrough in the Brexit talks. Sterling rose to just over $1.35 amid rumours that agreement had been reached over the border between Northern Ireland and the Republic of Ireland, but closed just above $1.345.