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Market needs Trump to stop tweeting and turn to tax reform

  • An estimated $2.6 trillion earned by American multinational corporations is sitting in overseas banks and will only come home if President Trump can oversee comprehensive tax reform.
  • About 20 percent of that hoard is owned by only five large tech companies — Apple, Alphabet, Microsoft, Cisco and Oracle.
  • Firms have spent record sums this year lobbying U.S. lawmakers to make it cheaper for them to repatriate their cash.
Armando La Rosa directs people to the Liberty Tax Service office as the deadline to file taxes looms on April 15, 2016 in Miami, Florida. The Internal Revenue Service moved the deadline from April 15th to Monday the 18th due to the Emancipation Day holiday
Joe Raedle | Getty Images

More than $2.6 trillion, all of it earned by American multinational corporations, sit idly in foreign banks. About 20 percent of that hoard is owned by only five large tech companies — Apple, Alphabet, Microsoft, Cisco and Oracle.

These firms, among others, have spent record sums of money this year lobbying U.S. lawmakers to make it cheaper for them to repatriate their cash. At 35 percent, the current federal corporate income-tax rate is among the highest anywhere in the world, and as foreign governments continue to lower their own rates, companies like Apple are less and less incentivized to bring their profits home.

Imagine if that $2.6 trillion were allowed to reenter the U.S. economy and be put to work. It would be a boon not only for investors and shareholders but also American workers, families and communities.

But reducing the corporate tax rate will take — figuratively and literally — an act of Congress, which so far this year has had little success in delivering on President Donald Trump's political agenda, even with a Republican majority. With hopes of repealing and replacing Obamacare officially dashed for now, Congress appears ready to move on to comprehensive tax reform after the August recess, but we could be in for even more gridlock.

It's mainly for this reason that many economists are starting to rethink their U.S. growth estimates. In July the International Monetary Fund revised down its forecast for domestic economic growth, from 2.3 percent to 2.1 percent in 2017 and from 2.5 percent to 2.1 percent in 2018. According to the Washington-based fund, the decisive factor in the revision "is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes."

Translation: It's going to take Trump & Co. longer than we initially thought to make good on tax reform, deregulation, debt reduction, infrastructure spending and other promised agenda items.

"Apple is likely to throw a sizable percentage of [revenue] atop the growing heap that sits overseas. And until Trump can lay off his tweeting and instead push Congress to pass tax reform, I'm afraid that's where it will remain."

Two notable confidence surveys show receding faith in Trump's ability to make policy a priority and avoid distraction from ongoing scandals and palace intrigue. The NFIB's Small Business Optimism Index fell from 104.5 in May to 103.6 in June, nearly two and a half points down from the index high of 105.9, set in January. This decline, as stated by NFIB economists William Dunkelberg and Holly Wade, is "no doubt in part due to the mess in Washington, D.C."

The YPO's Global Pulse Index for the United States, which gathers attitudes about the current economic climate from chief executives, fell 2.4 percent, or 1.6 points, to 63.3 in the second quarter. Like the Small Business Optimism Index, the YPO Global Pulse Index surged following November's surprise election, but it appears reality is beginning to set in for some business owners and executives who likely believed tax and regulation relief would be swift.

On the plus side, an overwhelming majority of YPO executives expressed optimism about sales growth a year from now. A little more than 70 percent said they expected sales to increase during the same quarter next year, compared to only 4 percent who said they expected them to decrease. A quarter of respondents believed sales would remain about the same.

Near-75% of S&P 500 companies are beating estimates

It's not hard to see why most executives have a rosy sales outlook. Corporate earnings are currently through the roof. Close to a record 75 percent of S&P 500 Index companies are beating not just sales estimates but also earnings per share (EPS) estimates for the second quarter, according to FactSet data. What's more, they're beating these estimates by wider margins than historical second-quarter averages.

Granted, only around 60 percent of companies have reported as of this writing, but the news is impressive nonetheless.

How much of this is due to euphoria over Trump's pro-growth agenda, and how much to a weakening U.S. dollar? That's difficult to say, but no one can argue the fact that American multinationals are benefiting from a weaker dollar, which makes them more competitive globally. Apple, which generated 61 percent of its revenue from foreign markets in the second quarter, just reported an all-time quarterly services revenue record. "Services," which include Apple Music, iTunes, iCloud and Apple Pay, brought in an astounding $7.3 billion, up from $6 billion during the same quarter last year.

Of course, Apple is likely to throw a sizable percentage of this amount atop the growing heap that sits overseas. And until Trump can lay off his tweeting and instead push Congress to pass tax reform, I'm afraid that's where it will remain.

— By Frank Holmes, CEO and chief investment officer of U.S. Global Investors

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