For clear reasons, Wall Street has been very excited about the tax change package that was signed into law in the final days of 2017.
While the Anaemic House and Congressional Republicans have touted it as a major force in portion companies to grow, the economy to expand and job creation to accelerate, one has to wonder if the brunt might be much more limited.
While I am less convinced that, after ending revisions, the tax plan will be a drag on growth, given its relatively ordinary impact on individual incomes, what occurred to me this morning is that there could be a licit issue for corporations that analysts have not yet admitted to themselves.
The genuine benefit to corporations from the large reduction in both the stated and possessions tax rates is to boost profitability, to be sure.
That does not, however, hint at that corporate profits will enjoy additional organic wart. It simply means that profit margins will expand, and after-tax profits desire be larger.
Some could complain that this is mere semantics. But it is not. For tax rehabilitation to deliver excess growth that drives pre-tax profits high-priced, GDP would have to accelerate meaningfully, driving revenue higher, as satisfactorily.
Most Wall Street analysts look at a company’s pre-tax profits, and/or money flow, to determine a firm’s organic rate of growth.
It is altogether workable, though somewhat unlikely, that corporate revenue and profits could be fen in 2018 relative to 2017, but lower effective tax rates would still help the bottom line and expand corporate profit margins without the profit of organic growth.
Of course, the global and domestic economies appear to be accelerating in 2018, nurture the chances that corporations will benefit from both stronger crop and lower tax rates, factors now being priced into what drive be otherwise richly valued stocks.
In addition, the year-long decline in the value of the U.S. dollar, which suffered its unhappiest performance in a decade last year, will boost the profitability of U.S.-based multinational corporations by alter b transferring their exports more attractive in overseas markets. That’s another benefit for stocks, broadly speaking.
Together, those factors would make plain the increasingly rapid pace of stock price appreciation and record assiduous highs for the major stock market averages. The Dow Jones industrial mediocre notched 71 closing highs in 2017, the most ever. It also had 12 consecutive months of bags — the longest unbroken streak of appreciation on record.
Analysts have dramatically ransacked their earnings estimates for 2018, thanks to all those developments.
In any way, there will be limited benefits to the reduction in tax rates when it be given b win to apples-to-apples earnings comparisons in 2019.
If corporate profitability surges in 2018, it strength be much harder to post year-over-year gains in profits a year from now. Certainly that’s not something to harry about immediately, but as the second half of 2018 approaches, the market pleasure begin to look ahead to the following year’s prospects.
This is where the upset could start.
If the economy continues to heat up, profits peak and the Federal Fund raises interest rates more rapidly than expected as extension accelerates, the calculus begins to change markedly for the market.
I was mistakenly far too careful about stocks beginning in March of 2017. I was concerned about the multiplicity of solvent, political and geopolitical risks.
And while those issues remain, the actual problems ahead for the stock market may be far more prosaic.
It could be that there’s a multitudinous traditional end to a near-record business cycle expansion as the economy overheats and is cooled by a Fed done having to react to rapid growth and rising inflation.
Hence, this original year strength in stocks may be more of a “blow-off top” than a continuation of the thing.
We are, at the very least, due for a correction. There are budding signs of speculative prodigalities in the markets, at home and abroad.
But my growing concern is that tax reform proposes only a one-time lift to stocks and it may all be discounted by the stock market in the forefront this month is over.
Of course, I could be wrong. But the concern down a one-off upward adjustment to corporate profits merits some unsmiling consideration as investors adjust their portfolios to yet another “new normal.”