Tech stocks and midcaps: Winners with tax cuts

U.S. companies have more than a trillion dollars in cash overseas, which they're reluctant to bring home for tax reasons, says Andrew Busch, a public policy strategist at BMO Capital Markets. The money has already been taxed abroad. But under U.S. tax rules, it would get taxed again if it made the trip home.

Obama has suggested he'd take steps to make it easier to bring the money back. Romney says more definitively that he wants to eliminate taxes on repatriated funds quickly, though he has restricted himself to not making tax cuts that raise the federal deficit.

This change would be a huge benefit to tech companies, one of the sectors with the most money abroad. Apple (AAPL), Microsoft (MSFT), Cisco Systems (CSCO), Google (GOOG) and Oracle (ORCL) each have tens of billions of dollars sitting in foreign accounts. "They would be major beneficiaries of a Romney victory," says Busch. (Microsoft is the publisher of MSN Money.)

Busch also believes Romney's desire to cut corporate taxes and tax exemptions would help small and medium-sized companies. The reason: "They don't have the legions of tax attorneys to take advantage of all the exemptions," he says. "If we get Romney as president, these stocks would outperform," he says.

Be careful what you wish for

But what should we expect stocks to do overall do under either contender?

Wall Street obviously prefers Romney. And more than 100 CEOs recently surveyed by Wells Fargo said they expect a better business environment and less regulation under Romney.

But these folks should be careful what they wish for, if history is any guide. Since the 1930s, the economy, stocks and company profits have all posted higher gains during Democrats' administrations.

But politics and investing being as confounding as they are sometimes, that's not the end of the story. History also shows that on average a victory by a challenger, regardless of party affiliation, generates much stronger stock market gains than an incumbent win, says Citigroup strategist Tobias Levkovich. That's true for both the first year of office and during the full term.

Unfortunately, though, the worst outcome is also the most likely: Romney or Obama as president, with a divided Congress -- meaning something like we have now, with a House controlled by Republicans and a Senate dominated by Democrats.

Since 1901, the average stock gain in the first year under a Republican president with mixed Congress is -1.7%, says Wells Fargo. A Democratic president and mixed Congress has produced average first-year gains of just 0.2% for the S&P 500.

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The best result for investors, according to history, would be a re-election of Obama and a Republican takeover of Congress. A similar scenario has happened twice -- in 1933 and in 1997 -- and those were two great years for stocks.

At the time of publication, Michael Brush owned or controlled shares of the following company or fund mentioned in this column in his personal portfolio: JPMorgan Chase.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.