Look no further than a consumer company executive to perfectly summarize why stocks have surged ahead of President Trump's tax proposal, which was unveiled on Wednesday.
"If consumers pay lower rates and have more disposable income then I certainly think it's fair to say that's a good thing for everyone," PepsiCo (PEP) - Get PepsiCo, Inc. Report CFO Hugh Johnston toldTheStreet in an interview when asked about the impact of a possible Trump tax cut. "Let's see how it goes through the legislative process before we get excited about it."
One part of the outline by the Trump administration on Wednesday would roughly double the standard deduction that Americans can use to reduce their taxable income. For married couples that would move from $12,600 to $24,000. This could cause people not to itemize their tax returns and rather opt for the standard deduction. In turn, the process would be simplified as well as potentially saving taxpayers thousands of dollars each year. That's money that could be spent on a few more cases of PepsiCo's beverages or a new wardrobe from Macy's (M) - Get Macy's Inc Report A delivery company such as UPS (UPS) - Get United Parcel Service, Inc. Class B Report could see orders tick higher as more confident consumers get to spending.
Either way, companies across the economy could see their bottom line boosted by a jolt to spending, which is one reason why investors have been bidding up stock prices.
The other components to the story is Trump's desire to slash the corporate tax rate to 15% from 35% and have a one-time "tax holiday" on repatriated cash. That could provide a serious lift to companies, with tech king Apple (AAPL) - Get Apple Inc. (AAPL) Report perhaps being the best example.
"Our analysis shows a reduction in the U.S. tax rate will drive a 6% benefit to EPS while a cash repatriation holiday and share buyback could drive an incremental 10% EPS benefit (assuming 25% of repatriated cash used for stock buyback)," Citi analysts wrote on the impact on Apple from Trump slashing the corporate tax rate to 15% from 35%.
"We see Apple as a significant beneficiary of Trump tax reforms," said the report's analysts Jim Suva and Asiya Merchant.
Johnston issued a reminder, however, that a multinational such as PepsiCo already pays a rate below the 35% threshold. So stock market bulls may want to chill out a touch.
"The devil's always in the details when it comes to tax policy. So, our overall corporate tax rate is around 24%, 25% and it [the benefit of the cut] really will depend on what's the rate, what are the changes to deductions, and then what are the policies going forward on overseas earnings and overseas cash."
Get ready to buy those new sneakers on credit at Macy's.
Jim Cramer and the AAP team hold a position in PepsiCo and Apple for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells PEP and AAPL? Learn more now.
Editor's Pick: Originally published April 26.