Trump Tax Trade Goes Cold as Prospects Dim for Quick Cut

(Bloomberg Gadfly) -- President Donald Trump says cutting corporate taxes is his No. 1 priority after repealing Obamacare. And House Republicans laid out on Thursday what they would like to see done with the tax code. Investors, though, appear to have lost faith in their ability to follow through.

The shares of the 100 S&P 500 companies that paid the highest effective tax rates last year, and therefore have the most to gain from a tax cut, have recently been lagging behind the rest of the index. Even more telling: At the same time, the 100 S&P 500 stocks with the lowest tax rates, those that stand to benefit the least from a tax break, have been outperforming the market. 

The difference is not huge, but the divergence has been particularly noticeable recently. High corporate taxpayers had widely outperformed the lower taxpayers soon after the election. But the total return since the election crossed paths in early May, about the time Trump fired James Comey as the director of the FBI. In the past two months, shares of the low taxpayers have risen just more than 4 percent. The high taxpayers as a group have been flat.

Increase in Shares of Companies That Would Benefit Least From Tax Cuts

4%

What's more, the high taxpayers as a group fell on Wednesday, a day after Trump reiterated that cutting corporate taxes was his priority. Of course, something other than taxes could be driving the groups' performance. Technology stocks make up nearly 25 percent of the low taxpayers and just 8 percent of the high taxpayers. Industrial companies, on the other hand, make up 25 percent of the high taxpayers and just 5 percent of the low ones. Financials, too, are a bigger portion of the higher tax-paying group. So the high index is a pretty good proxy of the companies Trump pledged to help during the campaign.

The good news is that the market is chugging along without the help from Washington. The bad news is that investors may have lost faith in any added lift from Trumponomics.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

To contact the author of this story: Stephen Gandel in New York at sgandel2@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.