Lower Taxes Should Boost Profits

Markets typically need a catalyst to break out of a multiple-year trading range. One possible candidate is the significant shift in market expectations related to the reliance on monetary policy relative to fiscal policy.

Lower Taxes And Higher Rates

The financial markets have been highly dependent on global central bankers in recent years (monetary policy). After the U.S. election, markets began to anticipate the possible benefits of President-elect Trump’s platform. From Yahoo Finance:

“We estimate that President-elect Trump’s corporate tax plan could boost S&P 500 earnings by $180bn,” writes Barclays’ Jonathan Glionna. “We think the market is underappreciating the likely big boost to S&P EPS from a lower corporate tax rate and the boost to bank profits from rising yields (and lower pension expense) and the much higher chance now of a long lasting economic expansion that rivals the 10-year US record,” Bianco added.

Numerous Longer-Term Market Signals

This week’s stock market video covers a long-term breakout in an economically-sensitive sector (XLB), describes a shift that has resulted in stocks outperforming bonds in the past, and updates the status of numerous long-term signals that have accrued in recent months.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Goldman’s Take On Trump’s Tax Plan

Sentiment shifts need to be backed by fundamental shifts for market gains to continue. The odds are extremely high corporate taxes are going to be lowered under the Trump administration. Lower taxes will impact earnings; the only question is the magnitude of the impact. From Yahoo Finance:

In a note to clients shortly after the election, analysts at Goldman Sachs outlined a number of tax scenarios that could play out in a Trump administration. Among them is a reduction in the statutory tax rate from the current 39% to 25%, while companies keep their strategies to pay less effective tax. Under this scenario, an effective tax rate falling to 15% could see S&P 500 earnings rise 26% in 2017 compared to 2016.

Investment Implications – The Weight Of The Evidence

Earlier in 2016, the markets were being led by defensive sectors (SPLV). Given the post-election shift in expectations regarding growth, earnings, inflation, and interest rates, demand for economically-sensitive sectors (SPHB) has improved relative to defensive sectors. Details regarding the shift below were outlined in a November 18 analysis.