New laws often take some time to get passed and they require a concerted effort on the part of the Executive and Legislative branches along with corporate support. Thus, despite a positive tone from Secretary Mnuchin and Gary Cohn plus support from the President, recent talk of getting tax “reform” in place may be buoying markets but may not come as fast as everyone might hope with a 1Q18 date being more likely than 4Q17. The idea of backdating personal tax cuts to January 2017 is intriguing and would make them more costly from a CBO scoring perspective. Plus, figuring out the details is still a work in progress from our sources on the Hill. Yet, any movement on the tax front arguably would be considered positive by markets if it boosts economic growth.
We are concerned that investors may read too much into the news flow since effective corporate tax rates are fairly low already (see Figure 1) and headlines touting a statutory rate coming down from 35% may not have as much actual EPS benefit as some may think. We have included a $4.00 benefit to our $139.00 earnings estimate in 2018 from lower taxes and it may be that the Street is gaining some conviction of a deal. The S&P 500 also may be discounting the possibility now, which would be a change from the last 22 years when stock prices started to mirror EPS shifts rather than moving three to six months in advance of profit trends (highlighted in Figure 2).
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
