Technology stocks have been roaring since Donald Trump took office, on Jan. 20, 2017, outperforming every other sector. To borrow an oft-used word from America’s 45th president, tech sector performance during his first year on the job was nothing short of “tremendous.” The S&P North American Technology Sector Index saw its level rise roughly 41% over the stretch, handily outperforming the S&P 500 index’s gains of roughly 24%. That difference is even more impressive considering that tech stocks were the biggest contributor to the latter index’s gains over the period.
Much of the technology momentum was unrelated to any specific governmental action, but there were some Trump-led initiatives that seem to have pushed share prices higher. Read on for a look at why tech sector stocks saw such strong performance during Trump’s first year in office.
Momentum from tax reform
The biggest impact that the government under Trump has had on tech sector performance is likely rooted in changes to tax policy. Trump campaigned on a plan to lower America’s corporate tax rate, initially targeting to lower the rate from 35% to 15%. That promise was a possible factor in the broader stock market momentum that kicked off shortly after his election and followed through his first year in office — even as the details of the tax-reform initiative shifted leading up to the passage of the Republican bill on Dec. 21. The law, dubbed the “Tax Cuts and Jobs Act,” eventually lowered the effective corporate tax rate to 21% — creating an earnings catalyst that signaled significant upside for tech companies and their shareholders.
The bill also introduced a one-time tax holiday that would lower the taxation rate for repatriating funds held abroad from 35% to 15% for cash, stock, and other liquid-asset profits, and to 8% for profits from real estate investments. This change is a substantial boon for companies with large cash piles abroad. Goldman Sachs estimates that American companies have roughly $3.1 trillion stashed offshore, and Apple (NASDAQ: AAPL), Microsoft, Cisco (NASDAQ: CSCO), Alphabet, and Oracle have the five largest amounts of offshore assets, according to Bloomberg.
At the time that the tax holiday was proposed, Apple held somewhere in the neighborhood of $250 million in cash and equivalent assets in foreign accounts, while Microsoft had roughly $132 billion in cash assets abroad. The enactment of the Tax Cuts and Jobs Act gave these companies and other tech leaders extra incentive to bring funds stateside and use them for capital expenditures, acquisitions, and returning value to shareholders.
Cisco has since announced that it plans to repatriate $67 billion from its offshore cash pile. The company’s management has stated that it will use the occasion of a repatriation-tax holiday to boost its dividend and fund acquisitions — developments that stand to deliver material benefits for shareholders in relatively short order.
As another example, Apple announced plans to invest $350 billion to build its business in the American market. CEO Tim Cook indicated that this big investment in the U.S. was largely made possible by reduced corporate taxes and repatriation rates. So, while it’s difficult to know exactly how much of the tech sector’s stock performance last year stemmed from Trump-led tax reform, there’s ample evidence that the legislative push was a contributing factor.
Broad momentum in tech
Another likely element to the tech sector’s top-notch performance throughout Trump’s first year in office was the improving market outlook for the industry’s major players. Leading technology companies had been posting strong sales and earnings growth prior to Trump’s inauguration, and this momentum looks set to continue as the reach and importance of their underlying businesses continue to grow.
Earnings trends across the sector during Trump’s first year in office were largely positive, even though some companies took up-front charges in relation to the new tax law. Amazon (NASDAQ: AMZN) saw sales in its December-ended fiscal year climb roughly 31% year over year — with net income up 25% over the stretch. Facebook’s (NASDAQ: FB) revenue climbed 47% during the same period, helping to deliver a 56% year-over-year increase for net income. And tech companies have continued on promising positive short-term earnings trajectories as the long-term prospects for industry leaders have become even more enticing to investors.
With trends like automation and artificial intelligence gaining steam, there’s a lot of upside for the companies spearheading these technologies or those in position to benefit. Real artificial-intelligence breakthroughs are almost certain to be era-defining events. How exactly these breakthroughs will shape the world, and business in particular, is unclear, but machine learning and increased automation can reasonably be expected to continue expanding the importance of technology in all business sectors. In light of that, owning leading tech companies has become a sort of insurance policy against the uncertainty that these changes create for other industries.
Tech companies are also seeing strong growth stemming from the implementation of service-based business models. This move away from one-time sales is giving tech leaders a foundation of recurring revenue that’s leading to more predictable and more profitable business. Between these promising trends and beneficial changes to the tax code, the big gains for tech stocks during Trump’s first year in office do not appear to be unwarranted, and it’s reasonable to expect that the sector will continue to lead the market’s overall growth over the long term.