Many see a 15% rise in the S&P 500 over the last six months and conclude that stocks are overpriced. The large gains and bullish sentiment is often described as the “Trump Effect”, but as Warren Buffett explained at Berkshire Hathaway Inc (NYSE:BRK.B) annual meeting, it’s not President Trump’s tweets that are moving stocks, but his policy.
BNL Finance has said many times that if President Trump is successful with tax reform that lowers corporate taxes and allows for cash repatriation, then stocks are very cheap.
Buffett explained that a reduction in the corporate tax rate could mean an additional billion dollars to its bottom line. More importantly, Berkshire Hathaway Inc (NYSE:BRK.B) has a deferred tax liability of more than $80 billion. If corporate taxes are lowered, Berkshire Hathaway Inc (NYSE:BRK.B) and its investors save a lot of money while also gaining larger profits year-after-year.
“The deferred taxes that are applicable to unrealized gains on securities would all be applicable to us,” according to Buffett. “We have $90 or $95 billion in gains, and our owners, dollar for dollar, will participate in that… If the rate were to drop 10%, that $9.5 billion is real.”
With that said, tax reform is clearly profitable for Berkshire Hathaway Inc (NYSE:BRK.B) and large financial institutions like Bank of America Corp (NYSE:BAC).
Companies with big earnings and relatively cheap stocks will be the biggest beneficiaries. We believe that Apple Inc (NASDAQ:AAPL) will be the biggest beneficiary of all.
With over $11 billion in last quarter profit, the difference between Apple Inc (NASDAQ:AAPL) pre and post-tax gains was more than $3.6 billion! If Apple Inc (NASDAQ:AAPL) tax rate declines by 10%, it could add a couple billion dollars to the company’s bottom line.
Apple Inc (NASDAQ:AAPL) has over $28 billion in deferred income taxes and more than $255 billion in cash & equivalents, most of which is off-shores. It’s the latter that makes Apple stock so attractive after tax reform. It is also one big reason that AAPL stock has been one of the biggest beneficiaries of the Trump Effect on stocks, rising 37% over the last six months.
The bottom line: Listen to Warren Buffett. He is smarter than you, or I. The Trump Effect on stocks has not ran its course, not if tax reform becomes a reality. Then, securities like Apple stock are still cheap.