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If you’re looking for U.S. tax cuts to contribute to market outperformance, you might be disappointed, as valuations are already high.

Read:

U.S. tax changes and market valuations

See how Trump’s tax bill has affected two big banks

Still, taking a close look at how tax changes affect U.S. corporates could pay off.

“Investors need to look beneath the surface to identify the longer-term winners,” says Richard Turnill, BlackRock chief investment strategist, in a weekly report. “There is significant dispersion within industries, sub-sectors and companies.”

Further, the sustainability of increased corporate profitability from the tax cuts will also vary.

“Companies in highly competitive industries, for example, will likely see a temporary profit boost that is quickly competed away,” he says.

Read: How Apple shows that innovation is overrated

Key to watch are changes in companies’ spending and investment plans as a result of the tax law.

“We expect U.S. global corporations to scrutinize the new tax code’s complex international rules in an effort to manage any rises in their effective tax rates,” says Turnill.

Investment-grade companies should benefit from lower rates, but “we see most of the impact going to shareholders rather than toward paying down debt,” he says. “High-yield companies benefit from lower tax rates and immediate expensing of capex.”

There’s a caveat, however: “We expect more bifurcation between higher- and lower-quality issuers, as ones with large debt loads face limits to interest expense deductibility,” says Turnill. “This reinforces our up-in-quality credit stance.”

Read: Reasons to watch U.S. credit spreads

For more details, as well as commentary on the Chinese economy and asset classes, read the full report.

Also read:

End-of-cycle positioning for portfolios

Originally published on Advisor.ca
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