It's estimated that over $500 billion was added to business sector coffers in 2005; mostly because of the American Jobs Creation Act of 2004. The American Jobs Creation Act significantly reduced the tax on corporations who bring home profits gained overseas. It is highly likely the business sector will use these profits for hiring, capital investments, research and development, marketing, acquisitions, pension funds, and debt payments (the new jobs act policy allows U.S. corporations a considerable amount of leeway with the earnings they bring home). According to the law, corporations have exactly three years to make proper use of funds. A company that previously targeted funds toward R&D could suddenly direct the money elsewhere and still receive credit for R&D.
Corporations that did not intend to show a profit in 2005 did. Although U.S. corporations only pay a 5.25 percent tax on the earnings they bring back to the U.S., it is still costing some companies one to several billion dollars in taxes (although the tax revenue will benefit the government next year). The corporate money fix will aid corporations by providing the U.S. economy new leadership as real estate, energy and consumer spending move lower.
Consumer spending, real estate and energy provided the U.S. economy a bang for the past few years. Therefore, the 2004 American Jobs Act should thrust the business sector into the driver's seat. Executive optimism is at an all-time business cycle high. This should encourage more corporations to hire and invest in infrastructure, R&D and acquisitions.
The odds for such improvement are extremely favorable. Higher interest rates and a higher dollar value should cause a drop in inflation hedge stock prices, as well as commodity prices. Taking profits out of inflation hedges would provide the stock market much less competition. This, coupled with a business sector spending spree, should allow for a quality stock market rally for much of 2006. High prices and higher interest rates will be waiting in 2007 and 2008.
