Tax overhaul may add fresh fuel to red-hot tech rally

SAN FRANCISCO (Reuters) - The biggest overhaul of the U.S. tax system in more than 30 years, set to win final approval by lawmakers on Wednesday, may add fuel to a rally in technology stocks that has powered Wall Street to record highs this year.

A lower corporate tax rate across the board and a one-time single-digit rate on profits repatriated from overseas looks set to benefit Apple Inc, Microsoft Corp and other U.S. tech companies with large foreign sales.

“The tech sector would certainly be among the largest beneficiaries if cash stashed overseas can be repatriated at a low rate and presumably used for stock buybacks or dividends,” according to a recent note from Ed Yardeni, president of Yardeni Research.

The S&P 500 information technology index has surged 39 percent in 2017, helped by expectations that U.S. President Donald Trump and his fellow Republicans would make good on promises to slash taxes.

That looked set to become reality on Wednesday as the Republican-controlled U.S. House of Representatives prepared for what should be a final vote on the tax bill, after which the bill will be sent to Trump to sign into law.

The information technology index dipped slightly on Wednesday after hitting a record high earlier in the week. It is still on track for its strongest year since 2009.

The tax bill cuts the U.S. corporate income tax rate to 21 percent from 35 percent. That should boost all U.S. companies’ profits, although analysts expect it to help technology firms less than some other sectors, such as transport, retail and banking, as tech firms already pay a relatively low rate.

A more salient benefit for Apple, Microsoft and other big tech companies - which have hoarded hundreds of billions of dollars of profits outside the United States - is the bill’s one-time tax of 8 percent on illiquid assets and 15.5 percent tax on cash and cash equivalents held overseas.

“I do think we’ll see some repatriation of cash from abroad,” said Tim Ghriskey, chief investment officer of Solaris Group, which is overweight in technology and financial stocks. “Tech has much further to go.”

EARNINGS GROWTH SEEN ABOVE AVERAGE

Even as the tech sector trades near high price-to-earnings levels not seen since 2008, and as some money managers turn to sectors likely to benefit more from the tax overhaul, other investors have poured more money into Silicon Valley.

Over the past week, net flows into the Technology Select Sector SPDR Fund grew by $581 million, according to ETF.com. That compares to a net outflow of $709 million from the fund in the first two weeks of December, when investors briefly worried the bill would include an alternative minimum tax, or AMT, that would have limited benefits of tax cuts for many technology firms. The AMT was excluded from the final package.

Technology sector earnings on average are expected to grow 12.3 percent next year, compared to an 11.3-percent increase across the S&P 500, according to Thomson Reuters I/B/E/S. But those figures are based on individual analysts’ estimates for the companies they cover, and few of those have adjusted their estimates yet to account for Trump’s expected tax cuts, which means profit growth estimates for other sectors may rise.

In its own forecast, UBS said the tax overhaul could deliver the technology sector an earnings boost of 5.3 percent next year, compared to an increase of 9.1 percent across the S&P 500.

Some technology companies like Cisco Systems Inc and Oracle Corp may also receive a secondary, trickle-down benefit if U.S. companies spend more of their increased profits from the tax cuts improving their productivity.

“To the extent that the tax package generates business spending and capex (capital expenditure), as it is intended to do, that will likely expand spending on software and technology,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.