Tax cuts are here.
On Wednesday, the House of Representatives joined the Senate in passing an overhaul of the U.S. tax code that will substantially cut corporate tax rates and rejigger the individual tax code with cuts that will expire over the next decade.
Following this move, the signature piece of legislation signed during the tenure of President Donald Trump, stocks — which have rallied for most all of 2017 — were little-changed.
In remarks made on the South Lawn of the White House, President Trump said it was “the largest tax cut in the history of our country.” And so with tax cuts coming to fruition, the major market catalysts of 2017 have wrapped up as we near the holiday weekend.
As for what is left on the schedule in 2017, on Thursday the economic calendar brings investors a third estimate of third quarter GDP, initial jobless claims, and home prices from the FHFA.
Notable earnings expected for release on Thursday include Nike (NKE), ConAgra (CAG), Cintas (CTAS), CarMax (KMX), and Finish Line (FINL). Both Nike and Finish Line will be tracked for signs of strength or weakness in the athletic apparel space, with Finish Line’s commentary on the mall business, to which it has considerable exposure, could make headlines.
The next phase of the tax debate
The Republican case for cutting corporate taxes is fairly simple — lower taxes will lead to companies paying employees more, hiring more employees, and investing in their businesses.
Shortly after Trump and other Republican leaders took a victory lap for their tax bill, AT&T (T) became the first company to say that tax reform really had made them want to do those things. In a statement put out Wednesday, AT&T said it would give its 200,000 employees a $1,000 bonus and would spend “at least” $1 billion to invest in its business, creating about 7,000 jobs.
Later, Fifth Third Bancorp (FITB) announced it would raise its minimum wage $15 an hour and would distribute a $1,000 bonus to 13,500 employees as a result of the tax bill, while Wells Fargo (WFC) announced an increase in its minimum wage to $15 million and a $400 million increase in philanthropic initiatives.
And so begins the first debate about whether the Republican tax bill works as intended or not.
Many were quick to point out that AT&T has been seeking Justice Department approval of a deal to acquire Time Warner (TWX), which has so far been blocked with the DOJ citing competitive concerns. Speculation around this action, however, has centered on Trump’s known distaste for CNN — one of Time Warner’s most valuable assets — and so the merger has become a political battleground.
CNBC’s David Faber noted Wednesday that AT&T thinks it’s unfair for anyone to equate their announcement to a political ploy to win favor with the Trump administration, but I also have a bridge to sell you.
Elsewhere, some have argued that these initial post-tax cut announcements of higher minimum wages at firms that don’t employ great numbers of hourly workers are really just providing companies cover for doing something the labor market has already determined needs to be done — raise wages. In this frame, corporate taxes are being used as an excuse to raise wages because companies don’t like admitting that they are losing leverage in labor negotiations.
And on Wall Street, at least one strategist altered their price target for the S&P 500 on Wednesday, with Citi’s Tobias Levkovich upping his year-end target for the benchmark index to 2,800 from 2,675 as a result of this legislation. But this outlook, in Levkovich’s view, is conservative relative to the earnings per share boost that some analysts could argue is enjoyed under a new tax regime.
So if we spent the last year arguing over whether or not the stock market had priced in tax reform or not — and Wednesday’s non-reaction to the news indicates that tax cuts were indeed priced in throughout the year — then 2018 sets us up for a debate about corporate action and the tax code.
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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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