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The Stock Market Cares About More Than Just Taxes

The Wall Street Journal logo The Wall Street Journal 10/12/2017 Akane Otani

Republicans’ latest attempt to push through a tax plan hasn't given an outsized boost to the shares of companies expected to benefit the most from it.

Since September, President Donald Trump and GOP leaders have been working to garner support for a tax overhaul that includes slashing corporate tax rates to 20% from the current 35%, ending estate taxes and introducing incentives for business investment.

Shares of the most highly taxed companies in the S&P 500 briefly bounced higher after Republicans introduced their plan on Sept. 27, according to a report from Credit Suisse . Then they gave up those gains.

In fact, Credit Suisse said its basket of high-tax-rate stocks hasn’t outperformed the S&P 500 since late 2016.

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Why the humdrum response? Some investors say the initial excitement around taxes from after Election Day has abated somewhat. Many believe tax cuts could boost corporate earnings growth and support the stock rally, but they aren’t counting on everything proposed in Republicans’ plan to be successfully pushed through, especially in a gridlocked Washington. And in any case, economic growth in the U.S. and abroad has been solid, helping stocks climb this year in the absence of a tax overhaul.

Some investors may also worried a tax cut “might elicit a hawkish response from the Fed, undermining potential benefits,” Credit Suisse said. Signs that the economy is heating up too much could push the Federal Reserve to hike interest rates faster than investors are currently expecting, sending borrowing costs higher and pressuring stocks.

So while some analysts warned at the start of the year that disappointment on the legislative front could put some pressure on stocks, it seems like more people are coming around to another idea: The stock market will probably be okay, with or without tax cuts.

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