March 1, 2018
Before considering what might be ahead in 2018, perhaps it’s worth looking back to acknowledge that 2017 was a banner year—both a great year for U.S. stocks, as well as the year when international markets turned a corner. In the United States, earnings for 2017 have been solid and growth expectations are on an upswing. Worldwide, gross domestic product growth ramped up in 2017, and the Organization for Economic Cooperation and Development has indicated that it expects to see every one of the 46 economies that it tracks post growth for 2017. The United States was able to shake off the lingering effects of recession faster than other nations, and we finally saw earning revisions improving and earnings growth accelerating on a global level. The world economy is now outperforming most predictions—a happy state of affairs that has not happened since 2010. Analysts are anticipating that this trend will continue and even strengthen throughout 2018.
Here in the United States, the major topic of conversation centers on how the Trump administration’s tax reform might affect the markets. Here’s a sampling of viewpoints regarding the possible effects of corporate tax reform:
- Many analysts hope the lower corporate tax rates will help stimulate confidence and job creation as well as boost after-tax earnings per share for many publicly traded companies. Other analysts believe that corporate tax cuts have already been priced into stock valuations and don’t believe the lower tax rates will fuel anything but modest growth. Some note that valuations are already well above long-term averages and don’t expect that tax reform will propel the overall market on any significant upward trajectory.
- Some analysts believe reduced tax rates will help boost consumer spending. Not everyone agrees of course. Some investment advisors believe consumer spending has been on an uptick for several years and don’t think cuts will have much additional impact on the economy.
- The new tax bill is expected to create winners and losers among sectors and investment instruments. Current prevailing wisdom suggests that financial companies—many of which currently pay the highest corporate tax rates among the S&P 500—will be major beneficiaries of the lower corporate tax rate. Technology companies also are expected to be big beneficiaries—mainly due to the profit repatriation provision contained in the tax reform package.
- Sectors expected to lose in the tax shakeup include consumer goods companies and retailers. Both would suffer under any border adjustment tax because they are major importers of goods. In addition, energy and telecom companies would probably lose out when the deductibility of interest payments is axed. These two sectors could be faced with paying more to service existing and new debt which would, in turn, eat into their profit margins.
Apart from tax reform, there are other key issues that could affect the markets in the new year. Under outgoing Chairperson Janet Yellen, the Federal Reserve has embarked on a steady course to gradually reduce the Fed’s reinvestment in mortgage-backed securities and treasuries. Under its new leadership (chairman and vice chairman), analysts expect a continuation of this strategy.
On the global front, North Korea remains a major issue, and the wave of populism in Europe that began with the Brexit vote also bears watching. If populist politics continue to triumph, the resulting isolationism could hurt equity markets worldwide.
The commentary above is general in nature and is not intended to replace the advice of tax and investment professionals.