What to watch

Will lower cor­po­rate tax rate lift stocks?

USA TODAY US Edition - - MONEY - Adam Shell

In the­ory, the less a com­pany pays in taxes, the more money that flows to the bot­tom line in the form of profit. The prospects for a lower tax rate for busi­nesses is not yet baked into stock prices. Pres­i­dent Trump’s stalled eco­nomic agenda is to blame.

But hope springs eter­nal. When Trump and GOP lead­ers this week an­nounced their plan to re­form the tax code — which in­cludes slash­ing the cor­po­rate tax rate to 20% from 35% — an­a­lysts ran the new num­bers to see how much it would ben­e­fit earn­ings, a key driver of stock prices.

Earn­ings for the Stan­dard & Poor’s 500 stock in­dex in 2018 would get a siz­able lift un­der the pro­posed plan, says Lind­sey Bell, in­vest­ment strate­gist at CFRA Re­search. Forty per­cent of the S&P 500 now pay an ef­fec­tive tax rate of 30% or more, she notes.

The S&P 500 is seen earn­ing

$143.65 in 2018, up 10.4% from an es­ti­mated $130.13 this year, S&P Cap­i­tal IQ said. But 2018 earn­ings are seen ris­ing to $154.43, or

7.5% more, at the lower 20% cor­po­rate tax rate, Bell’s data show. How does that im­pact stocks? It makes the mar­ket less pricey rel­a­tive to 2018 es­ti­mated earn­ings. The price-to-earn­ings ra­tio would de­cline to 16.2 from 17.4. And if the mar­ket con­tin­ues to trade at its cur­rent 17.4 mul­ti­ple — which is doable given low in­fla­tion and in­ter­est rates — the S&P

500 would rise to 2687, up 7% from its cur­rent level of 2510. “We ex­pect stocks to move higher in the next 12 months, es­pe­cially if we get tax re­form,” Bell says.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.