What to watch
Will lower corporate tax rate lift stocks?
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.