How Trump’s Tax Reforms Could Impact Equity Markets
Why equity markets appear to love the idea of a tax cut
Equity markets across the globe appear to welcome the idea of a US corporate tax cut. The assumption is that more residual profits would be channeled into business expansion and increase the dividends for investors, though it’s estimated that such cuts would increase the US federal deficit and debt significantly.
Equity markets in the US have already been driven higher by the prospect of a rate hike from the Trump administration, but can markets run much higher from here?
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Earnings per share could go up
According to a recent report on CNBC, Citibank estimates that for every percentage drop in the corporate tax rate, there could lead to an increase in earnings of $2 per share. If we consider the S&P 500 ETF’s (SPY) earnings estimate, which stands at $131 for 2017 and $140 for 2018, what could a corporate tax cut of 15% do for the S&P 500 Index’s (IVW) earnings?
Remember, very few companies in the US pay the full 35% corporate tax. The average tax rate for the S&P 500 (IVV) companies is about 27%, and not all these companies would be able to get the complete 15% benefit under Trump’s proposed tax plan. But even so, there could be substantial gains in earnings expectations if the tax reforms are passed through the various factions of both houses of US Congress.
Can the market rally continue?
It’s possible, of course, that Trump’s proposed tax reforms, if accompanied by stable economic growth, could keep equity markets’ (QTEC) current momentum in place. The 3Q17 earnings season has already begun, and expectations remain high for the quarter. All these positive factors could keep markets upbeat, but the real test will be when the final bill hits the floor for a vote.
In the next part, we’ll analyze which sector of the markets (IWV) could benefit the most from Trump’s proposed tax reforms.