Billionaire investors — including Tepper, Buffett — say Trump’s ‘huge’ tax cut is bullish for stocks

Key Points
  • The tax overhaul, which President Donald Trump signed into law last month, is significantly altering how investors value equities and the market.
  • "The tax act is a huge factor in valuation," Warren Buffett says.
President Donald Trump
Nicholas Kamm | AFP | Getty Images

Several of the most respected and influential investors in the world are growing more optimistic on equities due to the tax reform bill.

The Republican tax overhaul, which President Donald Trump signed into law last month, lowered the corporate tax rate to 21 percent from 35 percent.

Politics are now taking a back seat to simple math as investors are significantly altering how they are valuing stocks and the market.

Even though Warren Buffett supported Hillary Clinton over Trump in the last presidential election and has called for higher taxes on the wealthy, he explained Wednesday that the GOP corporate tax cut is a boon for shareholders.

"The tax act is a huge factor in valuation," Buffett said on CNBC's "Squawk Box." "You had this major change in the silent stockholder in American business who has been content with 35 percent ... and now instead of getting 35 percent interest in the earnings they get a 21 percent and that makes the remaining stock more valuable."

The billionaire chairman and CEO of Berkshire Hathaway worked through the simple math. He said as a result of the tax bill a stock owner's share of profits went to 79 percent from 65 percent.

"That's more than a 20 percent increase in the earning power. And you've just given it to me, nothing has changed in the business," he said.

In similar fashion, Bank of America Merrill Lynch on Jan. 3 raised its 2018 earnings-per-share forecast for the S&P 500 to $153 from $139 or 10 percent, using similar thinking.

Buffett also said the magnitude of the corporate tax rate cut is not reflected in the stock market yet.

"I think 21 percent was not baked in. That's a huge reduction," he added.

Buffett's right-hand man, Charlie Munger, welcomed the tax reform as economic policy more than his partner.

"I actually like this tax reduction that Berkshire's gotten. I'm an unabashed appreciator," he told CNBC on Wednesday.

On the tax plan he said, "I think there is a chance that it might work quite well … I think the people that are sure that it won't work probably shouldn't be quite so sure."

Other top hedge fund managers are on board in predicting further gains for the stock market, partly due to the higher profit streams from the lower tax burden.

Hedge fund manager David Tepper of Appaloosa Management told CNBC on Thursday that the market still isn't expensive.

"Explain to me where this market is rich? It's not rich with the tax thing that just changed earnings projections. With earnings forecasts going up and interest rates where they are, how is this market expensive? I don't see the overvaluation. World growth is higher," Tepper said.

Jana Partners' Barry Rosenstein, who manages $5 billion, said he is finding more stock ideas that fit the firm's criteria "than any other time."

"I agree with David [Tepper] completely. We are more invested today than we've ever been," he said Tuesday on CNBC. "The economy is growing. Earnings are growing. Rates are at all-time lows. It just seems like the market [rally] is going to continue for awhile."