5 Reasons New Tax Law Wont Boost Stocks in Long Term: JPMorgans Kelly

The New 20% Pass-Through Tax Deduction: An Advisors Guide

The Overlooked Economics of Trumps Tax Law

9 Ways New Tax Law Could Affect Clients Estate Plans

While the permanent 21% corporate tax rate in the new Tax Cuts and Jobs Act is boosting earnings forecasts for 2018, investors should curb their enthusiasm about what that means for stock prices in the long run, according to David Kelly, chief global strategist for JPMorgan Funds.

Kelly laid out in his Tuesday commentary five reasons for investors to not get their hopes up about the new corporate tax rate’s long-term impact on stock prices.

He also sees the “beta” play in stocks over the past year, with stocks soaring in anticipation of tax reform and then rising further once it passed, now turning into an “alpha” play post tax reform, and he cautions that 2018 will not be “as positive for stocks in general as many believe.”

Under the new tax law, “every company is impacted differently depending on their previous tax rate, their asset holdings overseas, their capital spending plans, their interest costs, their R&D budget, their tax-loss and tax-liability carry-forwards and a host of provisions of the tax act,” Kelly explained.

Because tax reform “has shuffled the deck and given each company a new hand,” Kelly told ThinkAdvisor in separate comments, “this is a great opportunity for fundamental investing.”

The alpha opportunity exists, he said, “for those investors and fund managers who can most accurately and quickly assess the value of these new hands.”

Forecasts of 2018 earnings “now stand at $150.57 for the full year compared to $145.80 just three weeks ago and $144.71 at the end of September 2017,” Kelly said.

The “sharp upgrade” in earnings forecasts is “almost entirely” due to passage of the new tax law. However, as Kelly explains, the following factors about the new tax law should dull investors’ enthusiasm:

1. The scale of the corporate tax cut, in total, is actually modest. 

The net cost to the federal government of the corporate tax cut, once the repatriation tax is included, is $329 billion over 10 years or $33 billion per year. This is less than 2% of the roughly $1.8 trillion that U.S. corporations are expected to make after taxes in 2018.

2. Earnings in 2018 are being bolstered by one-time charges to the fourth quarter of 2017. 

Accounting rules require companies to recognize their new liability for taxes on overseas assets in the period in which the law was enacted, i.e. the fourth quarter of 2017. Consequently, all the benefits of the tax law show up in 2018 and beyond while corporate balance sheets take a hit at the end of last year. It is notable that just since the start of the year, analyst estimates of 4Q2017 “as reported” S&P500 EPS have fallen by $4.67 – almost exactly offsetting the upgrade to 2018 earnings over the same period.

3. The benefits of the tax cut fade over time.

While the corporate tax rate has been cut permanently from 35% to 21%, a number of other provisions get less generous within a few years. In particular:

The net result of all of this is that 92% of the 10-year cash-flow benefits of the tax cut show up in just the next four years.

4.  The overheating caused by fiscal stimulus could squeeze margins.

Seventy-seven percent of the benefits of tax reform accrue to individuals and, as is the case on the corporate side, the tax cuts are front-loaded. In an economy which already is seeing solid growth, this fiscal stimulus could cut the unemployment rate to a 49-year low of 3.5% by the end of this year. However, if it does so, it should finally put some upward pressure on wage growth — good news for American workers but it would likely hurt corporate profits, both directly through higher unit labor costs, and indirectly as it could cause the Fed to raise rates faster, perhaps four times this year rather than the three they currently projected, thus contributing to higher corporate interest expense.

5. Today’s tax cut could mean future tax hikes.

The tax cut will result in significant increases in federal budget deficits over the next few years. No serious economist believes that it can pay for itself. Because of this, some future federal government will have to levy taxes to pay for the cost of this tax cut and no one should assume that corporations will be spared from contributing to this.

— Check out 10 Data Points Investors Should Be Watching Now: JPMorgan’s Kelly on ThinkAdvisor.

Lets cover some of the basics of this complicated provision so you can be sure to relate the correct information…

You are signed up!

A survey of advisors nationwide reveals how the use of ETFs is expanding and what factors are likely to further support this trend. padding: 0px 81px;width: inherit; Retirement Wire Retirement Wire

Your resource for news, research and analysis to help you deliver more effective outcomes to your clients. width:300px!important;max-height:36px; ThinkAdvisor TechCenter

ThinkAdvisor’s TechCenter is an educational resource designed to give you a competitive edge by keeping you abreast of new tech innovations and need-to-know information that can be applied to your business. width:300px!important;max-height:36px; Financial Education Resource Center Financial Education Resource Center

ThinkAdvisor and the College for Financial Planning have partnered to bring you a series of helpful educational tools that you can use to take your career to the next level. Resources How to Accelerate Time to Assets Under Management & Reduce Costs

Signatures are a cornerstone in the client lifecycle and transaction process for advisors. Learn how you can accelerate client decisions, reduce operating costs and provide…

In an increasingly competitive industry, advisors and independent broker dealers need to differentiate their firm. Learn how providing tax alpha at scale gives you a…

A comprehensive handbook for attracting clients through digital marketing.

Join this webcast to see how Trisha Qualy, Director of Wealth Management at AdvisorNet Financial, took client assets from $100 million to $1.3 billion in…

Join this complimentary webcast to learn innovative strategies that have proven effective in containing rising health costs.

Join this conversation as a panel of experts provides tips and best practices to optimize your tech resources for business growth.

Leave a Reply

Your email address will not be published. Required fields are marked *