Tax Cuts and Hikes: 3 Sector Stocks to Watch in 2024

Stocks to buy

A bill that could lead to some major tax cuts in the U.S. has been advanced. It’s named the “Tax Relief for American Families and Workers Act of 2024.” This legislation aims to enhance tax breaks for businesses and low-income families.

If approved, it will increase the child tax credit. Further, it can restore business tax deductions for research and development, as well as plants and equipment. This would be effective throughout 2025.

For investors, navigating these proposed tax cuts could lead to substantial portfolio gains. Ultimately, businesses benefit from more disposable income, as well as tax deductions for essential research and development activities.

Let’s examine three stocks that could directly benefit from this legislative development.

Microsoft (MSFT)

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Microsoft (NASDAQ:MSFT) is a leading player in the technology sector with significant investments in research and development. The company might benefit from tax deductions for R&D, of which it spent $27.195 billion in 2023 alone.

Being able to deduct its R&D expenses could save the business a significant amount of free cash flow. In turn, this could be used for other pursuits, such as accelerating stock buybacks or strengthening its 0.75% dividend yield.

However, one of the biggest draws for the technology sector is that it may have increased competitive positioning with countries like China. In reality, the U.S. has entered into a technology race within the fields of AI, semiconductors, and electric vehicles. 

Potentially, it could give an advantage to MSFT over its Chinese rival Alibaba (NYSE:BABA), within the highly lucrative cloud computing industry.

Lennar Corporation (LEN)

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Lennar Corporation (NYSE:LEN) is one of the largest home construction companies in the U.S. With the bill’s focus on tax breaks for affordable housing, LEN could see an increase in housing projects. And, subsequently its business will grow.

In addition to a potential increase in demand, it would complement an attractive previous quarter for the company. In Q4 2023, the brand’s revenue grew 8% to $11 billion. And GAAP EPS increased 6% to $4.82. Adjusted EPS rose 3% to $5.17. Also, Lennar Corporation experienced a 32% increase in new orders and a 19% rise in home deliveries.

Moreover, Wall Street believes that LEN’s outlook is positive for FY2024 and beyond. Namely, revenue is expected to grow by 2.78%, while a slight EPS increase of 3.32% is forecasted. Looking ahead to FY2025, EPS is anticipated to swell by a further 10.53%.

LEN may also benefit from the predicted fall in interest rates this year and into 2025, which could provide a further upside.

Walmart (WMT)

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Walmart (NYSE:WMT) could benefit from the increased child tax credit, as it may lead to higher consumer spending, especially in essentials and consumer goods.

I think that the tax cuts could be very accretive due to the nature of WMT’s business. Its extensive store network and online presence make it easy for consumers to cash in their savings for needed goods. 

Also, Walmart’s focus on value and price competitiveness aligns well with the spending habits and demographics of those who will receive the credit to begin with.

The additional sales from the tax cuts could help WMT increase its already strong EPS growth projections throughout FY2024 and FY2025. Those are expected to grow 9.32% and 9.53%, respectively.

An increase in EPS could lead to a material increase in its stock price, making it a stock to watch in the staples and consumer discretionary sectors.

On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Matthew started writing coverage of the financial markets during the crypto boom of 2017 and was also a team member of several fintech startups. He then started writing about Australian and U.S. equities for various publications. His work has appeared in MarketBeat, FXStreet, Cryptoslate, Seeking Alpha, and the New Scientist magazine, among others.

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