Morningstar

What Tax Reform Means for Stocks

With the bill nearing the finish line, we don’t foresee material changes to our fair value estimates or economic moat ratings since lower rates are already baked into our models.

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Many corporations, individuals, and President Donald Trump are likely to receive their holiday wish following the release of the conference report on the Tax Cuts and Jobs Act. The House of Representatives and Senate are now expected to vote on the final tax reform bill within the week.

As we expected, the political imperative for the Republican Party to have a major legislative win before midterm elections led to a series of compromises in the final bill that should ensure enough votes to pass the Tax Cuts and Jobs Act using budget reconciliation rules. Following approval from Congress, Trump can sign the bill into law.

We will adjust our valuation models for the final details of the tax reform bill after it’s passed, but the majority of the valuation effect of tax reform was incorporated into our models earlier this year when we implemented a 25% corporate tax rate assumption. Therefore, we don’t anticipate making material changes in our fair value estimates or our economic moat ratings.

Assuming the Tax Cuts and Jobs Act is signed into law, our thoughts going forward revolve around the longevity of the tax cuts and discerning differential effects on industries. There are definitely parts of the bill that should stimulate economic growth in the United States.

However, if the tax cuts do not pay for themselves through faster economic growth--and many studies of the tax reform bill project that the bill will lead to an increase in the national debt--then Congress may eventually have to raise taxes or cut spending.

2025 will be key for Congress, as many of the provisions benefiting individuals are set to expire at the end of 2025 unless Congress takes action to extend them or make them permanent. While the lower corporate tax rate will have a material, direct effect on corporate earnings, individual provisions will benefit certain industries more than others.

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About the Authors

Michael Wong, CFA

Sector Director
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Michael Wong, CFA is a sector director, AM Financial Services, for Morningstar*. He covers retail brokerages, wealth management firms, and investment banks.

Before joining Morningstar in 2008, Wong worked in corporate and public accounting. Before assuming his current role in 2017, he was a senior equity analyst, covering capital markets-related companies and insurers. Michael previously served as chair of the equity research department’s valuation committee.

Wong holds a bachelor’s degree in business administration, with concentrations in accounting, corporate finance, and financial services from San Francisco State University. He also holds the Chartered Financial Analyst® designation. Wong has also passed the Certified Financial Manager (CFM), Certified Management Accountant (CMA), and Certified Public Accountant (CPA) exams.

Wong won the “Technology Thought Leadership” award at the 2016 WealthManagement.com Industry Awards for his report, The Financial Services Observer: The U.S. Department of Labor’s Fiduciary Rule for Advisors Could Reshape the Financial Sector. In 2011, he ranked second in the Investment Services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. Wong was awarded the summer 2005 Institute of Management Accountants CFM Gold Medal.

Elizabeth Collins

Head of Credit Operations and Standards

Elizabeth Collins, CFA, is global head of equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. In this role, she leads the global equity research team, which focuses on providing in-depth, fundamental equity research based on sustainable competitive advantages and long-term valuation analysis. Collins is a member of the Morningstar Research Services Economic Moat committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar. She serves on the regulatory governance board for Morningstar Credit Ratings, LLC. Collins is also coauthor of Why Moats Matter: The Morningstar Approach to Stock Investing, published by John Wiley & Sons in 2014.

Before assuming her current role in 2018, Collins was director of North American equity research. She has also served as director of basic materials equity research, chair of the Morningstar Research Services Economic Moat committee, and a senior analyst on the energy team. She joined Morningstar in 2005. Previously, Collins worked as a youth program coordinator for a public housing community organization in Boston.

Collins holds a bachelor’s degree in psychology from Boston College and a master’s degree in business administration from DePaul University. She also holds the Chartered Financial Analyst® designation.

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