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Business: Wall Street’s love of tax cuts drove Dow to 25,000 mark

WASHINGTON (AP) — Wall Street sure loves the tax bill, even if polls show most Americans don’t.

The Dow Jones industrial average surged past 25,000 Thursday, a strong signal of investor enthusiasm for President Donald Trump’s $1.5 trillion tax cut. The milestone comes less than a year after the Dow topped 20,000.

“We broke a very, very big barrier,” Trump said Thursday at the White House. “Every time you see that number go up on Wall Street it means jobs, it means success, it means 401(k)s that are flourishing.”

The Dow jumped an additional 220 points Friday after the government reported that employers added 148,000 jobs last month and that the unemployment rate remained a low 4.1 percent. Investors celebrated the modest job gains because they made it less likely that the Federal Reserve will step up its pace of interest rate increases. Higher rates can depress share prices as some investors shift money away from stocks to bonds.

It’s easy to see why investors like the tax overhaul: Businesses will benefit from a steep cut in the corporate tax rate. They’ll also be able to fully deduct the cost of major purchases from their taxable income, reducing the amount they owe. And companies with large stockpiles of cash overseas can bring the money back to the United States at new, lower rates.

All told, Wall Street analysts estimate the tax package should boost earnings for companies in the Standard & Poor’s 500 index by roughly 8 percent this year. That’s much more generous than the average tax cut of 1.6 percent that middle-class families will receive, according to the Tax Policy Center.

“All else being equal, this should go straight to the bottom line,” said David Joy, chief market strategist for Ameriprise Financial, a financial services company based in Minneapolis. Improved corporate profits contributed to the market’s gains last year.

The public has been less enthusiastic about the tax law. A Monmouth University poll last month found that nearly half of Americans disapproved of it, with only 26 percent in support.

Still, some workers have seen a benefit: So far, dozens of companies have announced bonuses and higher minimum wages as a result of the tax cut. AT&T, Comcast, Bank of America, and American Airlines have all pledged to pay $1,000 bonuses to their employees.

Investors also appear less concerned than many politicians about how the additional profits will be used. The Trump administration says it expects companies will plow much of the extra profit back into their businesses, purchasing more software, machinery, and other equipment. Those investments will make workers more productive and provide a key boost to the economy’s long-run growth. They should also boost wages and salaries for employees.

Opponents of the tax law respond that companies are more likely to pass the windfall on to shareholders in the form of higher dividend payments and share buybacks, which raise the price of those shares still in investors’ hands. Previous cuts in corporate tax rates, in the U.S. and overseas, haven’t always led to higher wages.

For Wall Street, it’s all good, at least in the short run. Most analysts take the view that either way, companies and the economy will benefit. Whether businesses pass most of the extra money to workers or to shareholders, consumer spending should increase and lift economic growth.

Trump has repeatedly made highly optimistic claims about the impact of his tax cuts and other policies on the economy, speculating that they would lead to annual growth of 4 percent or higher.

Last month, the Treasury Department estimated that the economy will expand at a 2.9 percent annual rate for the next decade.

Private economists, as well as the Federal Reserve, forecast a more modest impact. Most expect growth will be closer to 2.5 percent in 2018 and slower than that in subsequent years.

Some companies and sectors will likely benefit more than others, particularly if they derive most of their income from the United States. Analysts at Goldman Sachs estimate that large banks will see their earnings rise by 13 percent as a result of the corporate rate cut. Wells Fargo will likely see the biggest gain, at 18 percent.

Analysts at Stifel, an investment bank, project that some restaurant chains could see earnings boosts of 20 percent or more, including Chipotle, Wingstop and Domino’s Pizza.

Barclays, another bank, says that technology and pharmaceutical firms, which are already paying lower taxes because they have lots of cash overseas, will see much smaller increases of less than 4 percent.

The legislation’s corporate tax cut is not necessarily as dramatic as it seems, because most corporations don’t end up paying the full 35 percent rate. Barclays estimates that the “effective” tax rate — what companies actually pay — will drop from 26 percent to 20.1 percent.

Joy and other analysts think that most of the money brought back from other countries will go to shareholders, rather than investment. That’s what happened in 2004, when companies were given a one-time low rate on repatriated cash as an inducement.

Opinions differ, however, when it comes to the additional profits that result from the tax cut. Many economists expect that most of those dollars will also be passed on to shareholders.

Glenn Hubbard, an economist at Columbia Business School and former top economist for President George W. Bush, says the corporate tax cut will eventually benefit workers through higher pay. That will also boost the economy and most businesses by lifting spending.

“Any way you slice it, it’s good for companies,” Hubbard said.

For much of last year, the stock market’s gains were helped by a synchronized global recovery, with economies from Europe to Asia to Latin America expanding simultaneously for the first time in a decade.

Since November, investors’ anticipation of a tax cut has pushed markets higher, said Keith Parker, an analyst at UBS.

Still, the market’s outsize return, benefits only a narrow slice of the population. According to research by Edward Wolff, an economist at New York University, just 10 percent of the population owns 84 percent of the stock market’s value.

“That benefit won’t accrue to everybody, certainly,” Joy said.

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NEW YORK (AP) — After another solid monthly jobs report, technology companies again led the way as U.S. stocks rose for the fourth day in a row to start 2018. They are on their longest new-year winning streak in eight years.

The Labor Department said employers added 148,000 jobs in December. That was a bit less than experts expected, but still underscored the continued health of the economy. Wages grew and factory managers received more new orders than in any month since 2004. Health care and consumer-focused companies also rose, and the weaker dollar gave industrial firms like Boeing and basic materials makers a lift.

Wages and worker productivity are rising at about the same rate, according to Ed Keon, managing director and portfolio manager of QMA, a fund manager owned by Prudential Financial. He said if that trend continues, company profits should stay solid and inflation won’t be much of a risk to the economy.

Productivity growth has been weak in recent years, but it jumped 3 percent in the third quarter. Keon said new technologies may now be helping businesses in a bigger way.

“It’s possible that we’re on the verge of a new productivity revolution,” he said. “If we are, that’s good news for wages, it’s good news for profits, it’s good news for economic growth, and it’s good news for the stock market.”

The Standard & Poor’s 500 index gained 19.16 points, or 0.7 percent, to 2,743.15, and rose 2.6 percent for the week. The Dow Jones industrial average added 220.74 points, or 0.9 percent, to 25,295.87. The Nasdaq composite rose 58.64 points, or 0.8 percent, to 7,136.56. The Russell 2000 index of smaller-company stocks rose 4.29 point, or 0.3 percent, to 1,560.01.

The Dow industrials closed above 25,000 points for the first time Thursday and the Nasdaq breached 7,000 points earlier in the week.

The last time stocks rose for at least four consecutive days to start a new year was in 2010, when the S&P 500 finished higher for six days in a row. It rose 1.9 percent over that run.

While job growth has slowed somewhat with the economy close to full employment, solid economic growth in both the U.S. and major countries overseas is still supporting more hiring.

Apple gained $1.97, or 1.1 percent, to $175 and Alphabet, Google’s parent company, picked up $14.53, or 1.3 percent, to $1,110.29. Chipmaker Xilinx jumped $3.66, or 5.2 percent, to $74.15 and eBay added $1.12, or 2.9 percent, to $39.69.

Consumer-focused and health care companies also stand to benefit from sustained economic growth. Amazon climbed $19.55, or 1.6 percent, to $1,229.14. Netflix advanced $4.36, or 2.1 percent, to $209.99. Used car retailer CarMax edged up $2.79, or 4.1 percent, to $71.04.

Among health care companies, Align Technology, which doubled last year, surged $7.77, or 3.3 percent, to $241.07 and contact lens and surgical products maker Cooper Companies gained $6.95, or 3.1 percent, to $230.50.

Bond prices fell. The yield on the 10-year Treasury note rose to 2.47 percent from 2.45 percent. The yield on the 2-year note rose to 1.96 percent from 1.95 percent.

With the holiday season in the rearview mirror, companies began to report their most recent results. Wine, liquor and beer maker Constellation Brands fell $5.91, or 2.6 percent, to $219.88 after its third-quarter report disappointed investors. Retailer Francesca’s plunged $1.55, or 20.7 percent, to $5.95 after it said it struggled over the holidays as fewer people came to stores and its shoppers spent less. It cut its profit and sales forecasts.

Barnes & Noble fell to its lowest price since 1994 after the bookseller said its sales slumped over the holidays. The struggles weren’t limited to its physical stores as online sales dropped 4.5 percent. That’s partly because Amazon continues to win over more and more people to its Prime membership program. Barnes & Noble sank 90 cents, or 13.8 percent, to $5.60.

Benchmark U.S. crude lost 57 cents to $61.44 a barrel in New York. Brent crude, used to price international oils, fell 45 cents to $67.62 per barrel in London.

Wholesale gasoline slid 2 cents to $1.79 a gallon. Heating oil declined 2 cents to $2.06 a gallon. Natural gas tumbled 9 cents, or 3 percent, to $2.80 per 1,000 cubic feet.

Gold rose 70 cents to $1,322.30 an ounce and silver picked up 2 cents to $17.29 an ounce. Copper slipped 3 cents to $3.23 a pound.

The dollar rose to 113.14 yen from 112.74 yen. The euro slipped to $1.2050 from $1.2072.

Germany’s DAX gained 1.2 percent and the CAC 40 of France added 1.1 percent. The FTSE 100 in Britain rose 0.4 percent. South Korea’s Kospi jumped 1.3 percent after North and South Korea agreed to hold their first official dialogue in more than two years next week to discuss ways to cooperate on the upcoming Winter Olympics in the South. Earlier, the United States and South Korea agreed to delay annual joint military exercises until after the Games, which will be held in February. Japan’s Nikkei 225 rose 0.9 percent and the Hang Seng in Hong Kong climbed 0.3 percent.

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AP Markets Writer Marley Jay can be reached at http://twitter.com/MarleyJayAP His work can be found at https://apnews.com/search/marley%20jayt

Contact Christopher Rugaber on Twitter at http://Twitter.com/ChrisRugaber

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