Corporate Tax Cuts Are Potentially A Big Plus For Stocks

Corporate Tax Cuts Are Potentially A Big Plus For Stocks
Image source: Pixabay

On the morning of his appointment, President-elect Trump’s selection for U.S. Treasury Secretary, Steven Mnuchin, said that tax reform will be a priority of the incoming administration and that the President-elect was still targeting a 15% corporate tax rate. The U.S. statutory Federal corporate income tax is currently among the highest in the world at 35%, while the effective tax rate was only slightly lower in 2015 at 29%. The prioritization of tax reform, inclusive of corporate tax cuts designed to improve the competitive position of U.S. corporations within the global economy, is potentially a huge plus for the equity markets since it can significantly boost earnings growth as early as 2017 and beyond.

Corporate Tax Cuts

While it is far too early to conduct a comprehensive cost/benefit analysis of tax reform since a detailed proposal is still lacking, the following back-of-the-envelope calculations illustrate the influence that corporate income tax cuts could have on the stock market. S&P 500 index constituent companies are currently expected to earn about $131 per-share in 2017, representing earnings growth of 11.8%, according to S&P Global Market Intelligence consensus earnings data. Accordingly, every one percent reduction in the corporate income tax rate could add back about $1.31 to anticipated 2017 S&P 500 earnings. A five percent reduction in the effective tax rate could hypothetically increase next year’s S&P 500 earnings by $6.55 to $137.54 per share, while a 10% reduction could boost 2017 earnings-per-share to $144.09. The improved calendar y