Deregulation, healthcare reform, infrastructure buildout, military buildup, better trade deals, immigration reform, border security … all these things were anticipated by both Wall Street and Main Street on Nov. 9, one day after Donald Trump became president.
Yet for Wall Street, by far the biggest anticipatory concern was the possibility of tax reform in general, and specifically corporate tax reform.
Here, Wall Street has been wishing and waiting for specifics.
It’s no secret that the smart money wants the corporate rate to go from the currently very high 35% to the relatively low hoped-for rate of 15%.
Well, today Wall Street finally got some progress on the corporate tax front. Reports surfaced that President Trump ordered White House aides to draft a tax plan that slashes the corporate tax rate to 15%.
Now, here’s the key part of this proposal …
The president wants the corporate tax reduction plan to be developed even if it means a loss of revenue.
According to news reports citing people familiar with the situation, the directions from Mr. Trump to his staff were both straightforward and unambiguous.
Here’s how the Wall Street Journal described it in an article in today:
During a meeting in the Oval Office last week, Mr. Trump told staff he wants a massive tax cut to sell to the American public, these people said. He told aides it was less important to him that such a plan could add to the federal budget deficit, though that might make it difficult to sell to GOP lawmakers who are wary of such a large tax cut. Mr. Trump told his team to "get it done" in time to release a plan by Wednesday, the people said.
This is the first step in the direction that Wall Street has been pining for since Nov. 9.
It’s also the one thing, if it passes, that can actually move the needle materially on equity valuations.
You see, if the corporate tax rate drops from 35% to 15%, that would directly add to the bottom lines of corporate profits. In many cases, it would add to them significantly.
That additional earnings tailwind would go a long way to justifying the current high valuation of the S&P 500. The benchmark U.S. index now trades at about 18.25 times 2017 earnings-per-share (EPS), and 17.75 times 2018 EPS.
Traders know this. And that’s one huge reason why the Dow shot back up above the psychologically significant 21,000 mark in Tuesday trade. The Nasdaq even cracked, and closed above, 6,000 for the first time.
No wonder the bulls came back, and danced jubilantly on the corner of Wall and Broad.
|The Dow gained 1.1%, the Nasdaq gained 0.7% and the S&P 500 gained 0.6% today.|
If the corporate tax rate does get slashed to 15% … and that is a big "if" given the lack of support for any tax reduction in the Senate and the slim Republican majority there … then it would make the U.S. corporate rate much more attractive relative to other nations.
The WSJ had a great graphic in the aforementioned article showing where we are now vs. rival economies.
Currently, our corporate tax rates are higher than France, Japan, the UK, Germany and Ireland.
Ireland has the lowest corporate rate. So is it any wonder why there have been some many "inversions" — i.e., companies around the world buying Irish companies so that they can officially domicile their organizations in that tax-friendly island nation?
If the U.S. rate can get dropped down this far, it would go a long way toward reversing the inversion trend … and toward getting companies back home to the U.S.A.
It also would do wonders for justifying the post-election rally … at least in terms of fundamentals and valuations.
Good luck and happy investing,
Uncommon Wisdom Daily