{"id":7403,"date":"2017-12-02T15:07:12","date_gmt":"2017-12-02T15:07:12","guid":{"rendered":"https:\/\/fundamentalis.com\/?p=7403"},"modified":"2017-12-02T15:07:12","modified_gmt":"2017-12-02T15:07:12","slug":"tax-reform-complicates-sp-500-earnings-analysis-thoughts-about-2018-sp-500-eps","status":"publish","type":"post","link":"https:\/\/fundamentalis.com\/?p=7403","title":{"rendered":"Tax Reform Complicates SP 500 Earnings Analysis – Thoughts about 2018 SP 500 EPS"},"content":{"rendered":"

Here<\/a> was the latest “cash repatriation” math for large-cap Tech in the event of major tax reform passing, and with the Senate passing a bill late Friday night, the probability of real reform becoming law is greatly improved.<\/p>\n

Capital gains treatment could also impact the market the next few weeks: here<\/a> is a Morningstar article by John Rekenthaler that talks about distortions that will result from the change to FIFO capital gains accounting for investors with taxable accounts.<\/p>\n

With the Tech sector weaker the last week, was it a function of the semiconductor sector weakness, the potential higher tax on cash repatriation (the last figure I heard was a 10% “repatriation” penalty but that doesn’t mean there is a higher number floating around Congress), or was it a function of selling your ’17 winners to avoid the FIFO cap gains change ?<\/p>\n

The Wall Street Journal ran an article early Saturday morning after the Senate bill passed, and in the article was a table comparing the House and Senate bills side-by-side and the 20% expected corporate tax rate stood the test of both Houses of Congress.<\/p>\n

The drop from an effective corporate tax rate of 30% – 35% currently, to an expected 20% (maybe why retailers or companies with the majority of revenues in US) will push 2018 EPS estimates up sharply when it happens.<\/p>\n

The ultimate question is how much of tax reform is discounted in current US stock market prices ?<\/p>\n

With the big rally Thursday after Senator McCain’s comments, maybe far less than we think.<\/p>\n

Financial’s had a big week the last 5 days: the XLF was up over 5% on the week, Schwab was up 8% (client’s largest financial weight) and CME broke firmly above its late December, 2007, high of $142.90. Here<\/a> was this blog’s latest Financial sector update from mid-November ’17. Here<\/a> is another blog post from early October ’17 beating the drum on Financials.<\/p>\n

The Financial sector has narrowed the under=performance gap with the SP 500 considerably the last 30 days.<\/p>\n

Thomson Reuters data (by the numbers) dated 12\/1\/17\u00a0<\/strong><\/em><\/p>\n