Opinion: Here’s how much Trump tax reform is already built into stocks
Move in the S&P 500 provides an answer
By Steve Goldstein, MarketWatch
As President Donald Trump releases the “principles” of his tax reform, it’s worth delving into how much is already baked into the stock market.
It’s not an easy exercise. People don’t fill out exit polls about why they’ve bought or sold a stock. With a little math, though, one can get an approximation of the answer.
First, let’s look at the S&P 500 (SPX). It’s gone from 2,139.56 at the close on Nov. 8, when Hillary Clinton was thinking she would be the next president of the United States, to 2,394.16 in midmorning trade on Wednesday. That’s a gain of 11.9%, but, for this exercise, the more important number is 254.6 — that’s the point gain for the index.
Next let’s deflate that number by the price-to-earnings multiple, which is about 24. So, in round numbers, there’s been an $11 increase in expected earnings for the S&P 500 companies.
Besides the election, what else has happened? There have been two interest-rate hikes from the Federal Reserve, the European and Latin American economies have stabilized, and Starbucks now sells unicorn-flavored Frappucinos.
So, again a judgement call, but we’re going to assign $10 of the $11 increase to the election. And, mostly, that call on a rise in EPS can be chalked up to an assumption of lower taxes.
In a research note, J.P. Morgan last month tried to quantify how a new tax regime would impact the S&P 500. They came up with a net boost of $8 per share — assuming a 20% tax rate, and not the 15% Trump has promised — though their estimate included an $8 per share drag from the border-adjustment tax.
Treasury Secretary Steven Mnuchin has declared the BAT notion to be dead, and J.P. Morgan said a BAT-less tax deal — with an even less-appealing corporate tax rate, maybe 27.5% — would lift the S&P 500 EPS by $9. Senate Republicans so far have not been willing to waive their rule that legislation passed under so-called reconciliation — which is filibuster-proof — has to be deficit neutral. So that means, for now, that, even with dynamic scoring, there will have to be measures in tax reform to pay for a lower rate.
All of this is a roundabout way of saying the market has basically priced in tax reform, unless there’s a substantial individual cut funded by increased deficits.
Courtesy of MarketWatch