Tech Cos. Like IBM Could See Tax Hike: Bernstein

The stock market continues its rally in 2018 as investors applaud the approval of the recent Republican Party tax bill, which will reduce the corporate tax rate and encourage the repatriation of cash abroad. While the fiscal review has been considered a great victory for US companies, a team of street analysts warns that it can actually end up increasing the tax rate for large technology companies, specifically those that offer services and software.

The tax plan, passed in December, could be bad news for technology titans, according to analysts at Bernstein, especially for the old business software company International Business Machines Corp. Analysts Toni Sacconaghi and Daniel Chen have written to customers predicting that IBM's standardized tax rate would increase from just 15% to "nearly 20% or more." They pointed out that because of deferred tax assets, IBM would only have to be charged once. Other "losers" are low-tax companies and some utilities.

The Tax and Employment Act, which lowers the corporate income tax rate by 14% to 21%, appears to be a big win for the market. While US corporations are by no means complaining, many of America's most powerful companies already had a tax rate of less than 35%. Four of the five largest companies in the S & P 500 have achieved an effective rate of less than 35% over the past 11 years, according to FactSet.

Recently, Goldman's analysts have reduced the technology from being overweight to neutral and writing that the Health and Technology plan should make the least gains. "Tech has the lowest effective tax rate in a sector [24%] and would benefit the least from the various proposals," analysts wrote before the bill was passed. "Although Tech has the highest expected revenue growth and profit margins, it also has the highest risk through tax reform, valuation and government regulation," Wall Street Bank wrote.