On 21 December 2017 President Trump signed into force the Tax Cuts and Jobs Act amending the Internal Revenue Code “to reduce tax rates and modify policies, credits, and deductions for individuals and businesses”1
The tax reduction will likely lead to higher corporate profits in three ways. First, it could add over $13 to EPS estimates for 2018 consensus estimates for the S&P 500, bringing the total to almost $1482
. Second, existing overseas profits can be repatriated over time at a reduced 15.5% tax rate, that is, they can be brought home progressively at a lower rate under the new “territorial scheme” vs. the old global system. And third, the U.S. economy should grow faster with the lower corporate and personal tax rates that should provide new incentives for working and investing. Economists have estimated at least a 50 bps additional increase in GDP growth for 2018 and the ensuing several years.
We think the overall impact of the 2017 corporate tax reform is positive, both on a micro level for individual companies and on a macro level for the economy overall. That being said, at Vontobel our goal is to take the long term view and not react too strongly to macroeconomic events such as tax changes.
1 H.R.1 – 115th Congress (2017-2018), congress.gov
2 Clifton, Dan, Strategas, 5 January 2018; Yardeni, Edward, S&P500/400/600 Annual Earnings, 4 January 2018, yardeni.com