There arguably wasn’t a more anticipated event for Wall Street in 2024 than Election Day. Although not all legislation on Capitol Hill ultimately impacts the U.S. economy or stock market, the lawmakers voted into public office help to shape the fiscal policy that affects corporate earnings.
Not long after the polls closed on Election Night, the Associated Press called the upper House of Congress for Republicans, as well as announced that former President Donald Trump had secured enough electoral college votes to become America’s next president. Trump secured 312 of a possible 538 electoral college votes, with Democratic Party presidential nominee Kamala Harris earning the remaining 226.
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During Trump’s first term in the White House, the stock market thrived. Despite navigating the short-lived COVID-19 crash in February-March 2020, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI), broad-based S&P 500 (SNPINDEX: ^GSPC), and growth stock-propelled Nasdaq Composite (NASDAQINDEX: ^IXIC) respectively gained 57%, 70%, and 142% while Trump was in the White House.
The prevailing question, from the standpoint of Wall Street and investors, is: What should be expected from Trump’s second term in the Oval Office?
Perhaps the closest thing we have to a certainty at the moment is an effort to further reduce taxes.
To be clear, there’s a lot we don’t know about what policy proposals we might see from the incoming administration. Even though President-Elect Trump will oversee a unified Republican Congress, the margin of majority is small enough in the House that there’s no guarantee of any bill being passed.
With the above being said, one proposal that could rapidly gain steam once Trump takes office for his nonconsecutive second term on Jan. 20 is further lowering the corporate income tax rate for businesses that make their products in the U.S.
Donald Trump’s flagship Tax Cuts and Jobs Act (TCJA), which was passed during his first term, lowered personal income tax rates (which are set to sunset 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.
While on the campaign trail, the now-president-elect suggested a plan that would slash the current peak corporate income tax rate by 29% — from 21% to 15% — for companies that make their products 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 price-competitive with products being imported from overseas markets.
According to an analysis conducted by the Washington, D.C.-based Committee for a Responsible Federal Budget, Trump’s proposal to further reduce the corporate income tax rate by 29% for domestic manufacturing companies would lower 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 rapidly rising national debt, a lower corporate income tax rate would produce a very clear winner, should it be enacted.
On paper, if select businesses are able to hang onto more of the cash they generate from their operations, it can result in an uptick in hiring, an increase in wages for existing workers, more merger and acquisition activity, and additional investment in innovation.
While we’ve witnessed pockets of increased capital spending in the wake of the TCJA permanently lowering the corporate tax rate from 35% to 21%, arguably the biggest correlation has been the significant uptick in share repurchase activity.
From 2011 through 2017, the 500 companies that comprise 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 winner of another round of corporate income tax rate cuts would undeniably be publicly traded companies that have prioritized share buybacks.
Buybacks are typically relied on for three reasons:
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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 big reasons behind Warren Buffett’s nearly $78 billion worth of buybacks at Berkshire Hathaway since mid-2018.
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For businesses with steady or growing net income, share repurchases can lead to higher earnings per share (EPS). For instance, Apple has lowered its outstanding share count by more than 42% since 2013, which has had a tangibly positive impact on its EPS.
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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 add fuel to the fire for share buybacks.
Though there are clear concerns and unknowns that exist as Trump prepares to take office in less than seven weeks, history suggests that investors who maintain perspective and look to the horizon are going to be well-positioned for success.
Even if Trump’s proposal to reduce the peak corporate income tax rate for domestic manufacturers from 21% to 15% fails to come to fruition, the nonlinearity of the economic cycle, as well as between bear and bull markets on Wall Street, should give investors reason to smile.
For example, recessions are a normal and inevitable aspect of the economic cycle. Every Republican president over the last century has overseen a recession while in the Oval Office. But since the end of World War II, nine out of 12 recessions resolved in under 12 months, with the remaining three failing to surpass 18 months in length.
On the other hand, the overwhelming majority of economic expansions endured for multiple years, including two periods of growth that reached the 10-year mark. Wagering on the U.S. economy to expand over time, regardless of which party controls the White House, has been a smart move.
This same nonlinearity can be observed in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.
For instance, Bespoke Investment Group released a data set on X in June 2023 that found the average length of an S&P 500 bear market to be 286 calendar days, or roughly 9.5 months, since the Great Depression began in September 1929. By comparison, the typical bull market over this 94-year period was 1,011 calendar days, or 3.5 times as long as the average bear market.
Regardless of how the political puzzle pieces are arranged or what new laws are put into place that can temporarily stir up investor’s emotions on Wall Street, the stock market continues to deliver for those who are patient.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
President-Elect Donald Trump Wants to Lower the Corporate Tax Rate by 29% — and There Couldn’t Be a Clearer Winner, if Enacted was originally published by The Motley Fool