In the prospect, President-elect Donald Trump intends to decrease the corporate tax rate by 29%; such a move could potentially yield an uncontested victor, if effectively implemented.
In the prospect, President-elect Donald Trump intends to decrease the corporate tax rate by 29%; such a move could potentially yield an uncontested victor, if effectively implemented.
Undeniably, there wasn't a more anxiously awaited event for Wall Street in 2024 than Election Day. Although not all bills that get passed on Capitol Hill ultimately affect the U.S. economy or stock market, the lawmakers who get elected into public office significantly influence the fiscal policy that impacts corporate earnings.
Right after the polls closed on Election Night, the Associated Press declared the upper House of Congress for the Republicans and announced that former President Donald Trump had amassed enough electoral college votes to secure the position of America's next president. Trump garnered 312 of a possible 538 electoral college votes, with Democratic Party presidential nominee Kamala Harris gathering the remaining 226.
During Trump's initial term in the White House, the stock market soared. Despite dealing with the short-lived COVID-19 crash in February-March 2020, renowned indices such as the Dow Jones Industrial Average (^DJI -0.07%), widely-followed S&P 500 (^GSPC -0.43%), and fast-growth stock-driven Nasdaq Composite (^IXIC -0.90%) respectively grew by 57%, 70%, and 142% while Trump was in power.
The query that's dominating the thoughts of Wall Street and investors is: What should we anticipate from Trump's second term in the Oval Office?
To put it simply, one thing we can almost certainly count on is an effort to reduce taxes further.
Trump aims to further decrease the corporate income tax rate by 29%
It's worth noting that there's a great deal of uncertainty regarding the specific policy proposals we might see from the incoming administration. Despite President-Elect Trump overseeing a unified Republican Congress, the margin of majority is slender enough in the House that there's no assurance of any bill passing.
Given this, one proposal that could swiftly gain popularity once Trump assumes office for his nonconsecutive second term on Jan. 20 is further reducing the corporate income tax rate for businesses that manufacture their products in the U.S.
Donald Trump's flagship Tax Cuts and Jobs Act (TCJA), which was introduced during his first term, lowered personal income tax rates (which are set to expire on Dec. 31, 2025), as well as permanently reduced the corporate income tax rate from 35% to 21%. This 21% peak marginal tax rate for businesses is the lowest since 1939.
During his campaign, the now-elected president suggested a strategy that would drastically reduce the current peak corporate income tax rate -- from 21% to 15% -- for companies that produce their goods domestically. This proposal, along with tariffs on imported goods into the U.S., is designed to promote domestic manufacturing and make U.S. goods more reasonably priced compared to products from foreign markets.
According to an analysis carried out by the Washington, D.C.-based Committee for a Responsible Federal Budget, Trump's proposal to further lower the corporate income tax rate by 29% for domestic manufacturing companies would decrease federal revenue by approximately $200 billion through fiscal year 2035 (the federal government's fiscal year ends on Sept. 30).
While this isn't ideal for America's quickly expanding national debt, a lower corporate income tax rate would yield an undisputed winner, should it be enacted.
Lowering the corporate tax rate would support a multitrillion-dollar investment
On paper, if select businesses are able to retain more of the money they make from their operations, it can result in an increase in hiring, a rise in wages for existing workers, more merger and acquisition activity, and additional investment in innovation.
Since the TCJA permanently reduced the corporate tax rate from 35% to 21%, we have seen pockets of increased capital spending. However, arguably the most notable impact has been the significant increase in share repurchase activity.
From 2011 through 2017, the 500 companies that make up the benchmark S&P 500 cumulatively repurchased between $100 billion and $150 billion of their company's stock per quarter. But since the TCJA became law, buybacks from S&P 500 companies have regularly ranged from $200 billion to $250 billion per quarter, with the exception of a few quarters during the early stages of the COVID-19 pandemic.
The clear benefactors of another round of corporate income tax rate cuts would inevitably be publicly traded companies that have prioritized share buybacks.
Buybacks are typically employed for three reasons:
- Steadily buying back a company's stock can incrementally increase the ownership stakes of existing shareholders and encourage long-term investing. This is one of the key reasons behind Warren Buffett's nearly $78 billion worth of buybacks at Berkshire Hathaway since mid-2018.
- For businesses with steady or growing net income, share repurchases can lead to higher earnings per share (EPS). For example, Apple has reduced its outstanding share count by over 42% since 2013, which has had a tangibly positive impact on its EPS.
- Buybacks demonstrate to Wall Street and investors that a company's board and/or management team view their shares as intrinsically cheap.
Although not every company would qualify for Trump's proposed lower corporate income tax rate, it would likely serve as additional fuel for share buybacks.
Even if Trump's plan to decrease the highest corporate income tax rate for domestic firms from 21% to 15% doesn't happen, the unpredictable nature of the economic cycle and the shift between bear and bearish market periods on Wall Street should provide investors with some positivity.
It's important to remember that recessions are a natural part of the economic cycle. Every Republican president of the past century has experienced a recession while in office. However, since World War II, nine out of twelve recessions ended within 12 months, and the remaining three lasted no longer than 18 months.
Conversely, most economic expansions have endured for multiple years, with two periods of growth spanning the 10-year mark. Betting on the U.S. economy to grow over time, regardless of who's in the White House, has proven to be a shrewd decision.
This same unpredictability can be seen in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.
For example, according to a study by Bespoke Investment Group, published in June 2023, the average duration of an S&P 500 bear market is 286 days, or around 9.5 months, since the Great Depression began in September 1929. In contrast, the typical bull market during this 94-year period lasted 1,011 days, which is around 3.5 times longer than the average bear market.
No matter how the political landscape changes or what new laws are passed, causing short-term turmoil on Wall Street, the stock market continues to reward those who are patient.
After Trump's proposal to further decrease the corporate income tax rate for domestic manufacturing companies was analyzed, it was found that this move would decrease federal revenue by approximately $200 billion through fiscal year 2035. Investors are anticipating that this lower corporate income tax rate could lead to increased hiring, higher wages, more merger and acquisition activity, and additional investment in innovation.
Given the success of share repurchase activity since the TCJA became law in 2017, with S&P 500 companies consistently buying back between $200 billion to $250 billion per quarter, another round of corporate income tax rate cuts would likely serve as additional fuel for share buybacks.