Four Ways the Tax Bill Is Really a Stimulus Bill

Four Ways the Tax Bill Is Really a Stimulus Bill

VIEW IN BROWSER

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

“Trump always chickens out”…

Or as you’re more likely seeing it these days, “TACO.”

The meme is that President Donald Trump – whether he’s in office or not – always backs down from his most ardent, extreme, upfront demands and inevitably compromises on a neutered version of them.

To this I say… yep.

That’s right.

It’s always been right.

TACO is nothing new. It’s just a rebranding (evidently unwelcome to the White House) of Trump’s signature negotiating style profiled in The Art of the Deal.

We have discussed the Art of the Deal for months, because it is heavily guiding the trade negotiations happening with dozens of major trading partners right now.

It started in relatively smaller scale in January and February, when Trump fired the first salvo of his tariff policy at our biggest trading partners, Mexico and Canada.

As you’ll remember, those initial big rates were later delayed to make room for trade talks, which in some ways are still ongoing and in other ways are already settled. Trump resolved to “fight again in 30 days.”

Then came April’s Liberation Day, the emotional wounds of which are still fresh in the hearts of investors everywhere. (And financial wounds, if you cashed out and subsequently missed the recovery rally.)

Trump unleashed scores of tariffs larger than anyone anticipated. The stock market felt immediate pain, falling nearly 20% from the late February peak to its early April trough.

But, once again, negotiations began. The tariff can got kicked down the road. Word of trade deals with China and other large economic powers began creeping out. And while nothing is minted yet, major compromises have been made, which have directly correlated with the stock market’s rise.

At one point, tariffs on China were at 145% and an additional 20% tied to fentanyl. China retaliated with 25% tariffs. Today those numbers are 30% and 10%, respectively, with a deal still in the works.

Just last week a deal with Vietnam was reached, with tariffs still in place on Vietnam but with U.S. goods allowed to enter the country duty free.

Here’s what you need to understand…

Even though the book hasn’t closed on these tariffs, there’s a strong perception that major trade deals will inevitably bring clarity.

You can call it TACO or Art of the Deal or whatever you like. The point is, these trade deals are being negotiated and the markets are broadly optimistic.

Now, what do we see today? Trump is enacting a bunch more tariffs on much smaller trading partners: Japan, South Korea, Malaysia, Kazakhstan, Tunisia, Laos, South Africa, Myanmar, and more.

Makes for a great headline. But then you realize that the collective value of the imports from these countries is around $350 billion… or close to half of our imports from the EU.

This White House is teaching investors to wrangle the chaos in their favor by, in no small words, buying the dip.

When you see markets go nutty over the newest tariff headache, that should be your cue to start looking for great buys.

And that’s not the only clue…

Over the July 4 weekend, Congress passed the One Big Beautiful Bill Act (OBBBA). It’s being touted mainly as a permanent extension of the 2017 Tax Cuts and Jobs Act. But on top of that, it’s really a heap of stimulative government spending.

Where this takes the U.S. on its fiscal path is a story for another time. The short version is: nowhere good. But until then, let’s look at how this bill stimulates the market.

The tax cut extensions alone are significant. Corporate taxes will remain favorable for the foreseeable future, which is what any investor in a large corporation (just about all of us) want to see at least when it comes to investment returns.

But just as significant is the new ability for businesses to deduct equipment and research and development costs from their taxes.

This is huge for high-growth tech, in particular, which invest heavily in R&D.

Not only that, tax deductions for loan interest payments has been expanded. That further brings down the cost to borrow for growing businesses.

That’s not to mention the hundreds of billions being spent on defense and national security, border enforcement, infrastructure, and more.

But let’s stay focused on where these tax cuts will make the biggest impact.

Remember how last week we looked at which types of tech stocks tend to outperform the benchmark, finding that indebted tech firms were the ticket? (No action there, by the way – the holdings are still OPRA, PRGS, OSIS, ALRM, and IT.)

That’s only more true now, with high-growth companies able to deduct research and development costs from their taxes.

And from what I see, this action is poised especially to benefit mid-cap stocks.

Take a look at this chart of the mid-cap S&P 400 (MID) vs. the large-cap S&P 500 (SPX). This monthly chart going back to the turn of the century shows that, from around 2003 to 2010, mid-caps gained 50% against large-cap stocks:

This period of time was what largely contributed to mid-caps’ long-run outperformance against both large- and small-cap stocks, with that benchmark returning more than 2,500% vs. 1,500% for the S&P 500.

We can also see that back in 2002, mid-cap outperformance stalled for a bit around 0.5, consolidated, and then broke above that level… the same level we recently bounced off today.

Note also the Rate of Change (ROC) indicator at the bottom. That’s calculated with a 12-month rolling plot and a 12-month moving average. As mid-caps have continued to lose ground against large caps, the ROC has slowed down significantly.

I think this points to some strong outperformance in mid-caps going forward. The sector is so relatively cheap compared to large caps, it’s destined to play catch-up. And the new tax benefits in the OBBBA lend a helping hand to smaller companies still in growth mode.

That’s not to say large caps won’t benefit. In fact, they’ll probably be the largest beneficiaries in terms of total tax dollars saved. But it won’t make nearly as big of an impact on growth rates as it will on mid-caps.

Here’s a quick screen of mid-caps that rate well on Louis Navellier’s stock grader, which we’ll talk more about in just a second…

Are you ready for Trump’s next big market move?

Before I go, I’d like you to hear from someone who’s directly plugged into Trumpworld… because he believes that Trump’s next announcement could change the game yet again.

Louis Navellier has “some wonderful memories” of bringing his family to parties at Mar-a-Lago. The Navelliers live nearby and get invited pretty regularly to shake hands with senators and billionaires. His son went to school with the son of Howard Lutnick, which is how Louis got to know the now-Secretary of Commerce.

Louis is worth listening to. For the past 40 years, he’s been recommending the best-of-the-best growth stocks based on the very same grading system that pulled the list of mid-cap stocks I showed you above.

From everything Louis saw and heard, he was among the first to realize that “Trump 2.0” would bring us a huge push to revitalize manufacturing, energy, and AI.

Boy, has it ever.

Now with his famous signature drying on the big tax bill, Trump can turn to the next chapter.

One so important to his circle of advisers that they consider it a matter of national security.

See, Trump has no intention of losing the AI race to China. And that’s why Elon Musk, David Sacks, and Peter Thiel all came together to support him in the first place.

In fact – one of his executive orders put a specific deadline on a plan to overhaul and secure America’s AI infrastructure.

That clock runs out on July 22.

And when it does, the companies that can provide this infrastructure are set to dominate the previous class of “AI stocks.”

Tonight at 8 p.m. Eastern, Louis will publish a presentation all about “Trump’s AI Day” and how to reposition your portfolio accordingly. Click here to save your spot at the briefing – all attendees will be getting one of Louis’ top stock picks to get you started.

To building wealth beyond measure,

Michael Salvatore
Editor, TradeSmith Daily