It looks as if the top Federal corporate tax rate will be declining from the current world-high 35% to a more median-ish 20% or so. The consensus guess, which I think is as good as any, is that this change will mean about a 15% one-time increase in profits reported by S&P 500 stocks next year.
However, Wall Street has held the strong belief for a long time that this would happen in a Trump administration. Arguably (and this is my opinion, too), one big reason for the strength in US publicly traded stocks this year has been that the benefits of corporate tax reform are being steadily, and increasingly, factored into stock quotes. The action of computers reading news reports about passage is likely, I think, to be the last gasp of tax news bolstering stocks. And even that bump is likely to be relatively mild.
In fact, one effect of the increased economic stimulus that may come from lower domestic corporate taxes is that the Federal Reserve will feel freer to lean against this strength by moving interest rates up from the current emergency-room lows more quickly than the consensus expects. Although weening the economy from the addiction to very low-cost borrowing is an unambiguous long-term positive, the increasing attractiveness of fixed income will serve as a brake on nearer-term enthusiasm for stocks.
What I do find very bullish for stocks, though, is the surprising strength of consumer spending, both online and in physical stores, this holiday season. We are now nine years past the worst of the recession, which saw deeply frightening and scarring events–bank failures, massive layoffs, the collapse of world trade. It seems to me that the consumer spending we are now seeing in the US means that, after almost a decade, people are seeing recession in the rear view mirror for the first time. I think this has very positive implications for the Consumer discretionary sector–and retail in particular–in 2018.
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