One primary reason U.S. equities have been pushing higher and moving the Dow Jones industrials index near the 20,000 threshold -- before Wednesday’s 119-point drop on Fed rate hike worries -- is a surge in big-cap technology stocks. This is a reversal of the recent trend of tech stocks lagging in the post-election rally, and it could get a boost from Wednesday’s “tech summit” between Silicon Valley leaders and President-elect Donald Trump.
The tech stocks’ move has reinvigorated the post-election market melt-up that had been led by “hard economy” plays like industrials, materials, financials and energy stocks as investors responded to Mr. Trump’s economic plans, which amount to an aggressive fiscal stimulus of tax cuts and infrastructure spending.
Moreover, his anti-immigration stance suggested companies like Facebook (FB) and Microsoft (MSFT) -- which are heavy users of H1-B skilled worker visas -- would see a clampdown on cheaper foreign labor. That would boost their expenses and weigh on profitability. Along with portfolio outflows as hedge funds and other investors sold post-election underperformers to chase new leaders, the result was a disappointing share price performance for the group over the past month (chart below).
One top topic at the Wednesday meeting between Trump and the tech CEOs was how to bring high-paying jobs back to the U.S. The industry already seems to see the writing on the wall, with IBM (IBM) CEO Ginni Rommety writing an op-ed in USA Today touting Big Blue’s plans to hire 25,000 people in the U.S. and invest $1 billion over the next four years in “new collar” jobs via employee vocational training.
But more than that, the meeting provided a chance to patch up relations between one of the fastest growing, most dynamic sectors of the American economy and the incoming Trump administration -- two groups that were often at odds with each other during the heated campaign season.
While disagreements may linger on issues like net neutrality, “fake news” censorship and immigration, common ground on issues like corporate tax cuts and repatriation of capital being held abroad may well be found.
Just look at Apple (AAPL): Of the company’s more than $215 billion cash and cash-like reserves, nearly $178 billion of it is parked overseas.
According to Ed Yardeni of Yardeni Research, cutting the tax rate on repatriated earnings held overseas from 35 percent to 10 percent could bring back upwards of $2.4 trillion in cash. This could fuel not only investment spending and hiring at home but also fresh share purchase buybacks and dividend hikes.
All of which could be great news for not only tech sector share prices but U.S. GDP growth as well.
As for a cut in the ongoing corporate tax rate, Yardeni’s researchers estimate that slicing the rate to 15 percent (from the 27.5 percent effective rate in 2015) would boost S&P 500 earnings from $132 a share in 2017 to around $155, a 17 percent increase.
It’s no wonder that the tech-heavy Nasdaq Composite has punched up and out of a long five-month consolidation range to push to its own new record high on Tuesday. Now, with tensions lessened between the tech titans and Mr. Trump, more new records could be on tap.