Earlier today, we brought you some excerpts from Goldman’s year ahead S&P outlook which is now ricocheting around the financial media and should serve to further embolden retail investors who are just fine with Goldman as long as the Squid is telling them what they want to hear (in this case that the market is going to rally by another 11% in the year ahead).
One of the caveats in Goldman’s outlook centered around the idea that tax cuts might not materialize or, perhaps more appropriately, that this process will continue to be so fraught as to make it a source of ongoing angst as opposed to a reason to celebrate.
“If only Congress can pass some program of tax cuts, the thinking goes, this will provide fuel for the next leg of the equity rally – heck, maybe Donald Trump and Gary Cohn are correct and the tax plan will extend 3% economic growth for the foreseeable future!,” Bloomberg’s Cameron Crise sarcastically notes on Tuesday afternoon, before cautioning that “while it’s true cutting the corporate tax rate will benefit individual firms, on an aggregate basis the benefits look much more modest [and] anyone expecting a 1986-style revolution is likely to be disappointed.”
Yes, “you’re likely to be disappointed” with the results of something that emanated from the brain of Donald Trump – imagine that. Hopefully, you’ve already set the bar appropriately low.
In any event, Goldman warns that the S&P 500 would fall by 5% to 2450 in the near term if tax reform fails to occur and a failure on that front would likely also imperil things further out given that the lion’s share of the EPS increase baked into Goldman’s forecast comes from tax reform. Here’s Goldman with the details:
We estimate that corporate tax reform will boost 2018 S&P 500 EPS by 5%. Both the House and Senate proposals call for a reduction in the domestic federal statutory corporate tax rate to 20% from 35%. While the tax cut would take effect in 2018 under the House plan, the Senate proposal would delay the tax cut until 2019. Given the $1.5 trillion size constraint, a lower corporate tax rate would be funded through a variety of “pay-fors.” These pay-fors create “winners” and “losers” from tax reform but may have difficulty passing both chambers. We estimate this tax cut would add roughly $7 (+5%) to 2018 adjusted EPS.
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