January 17, 2017
Could Proposed Tax Reforms Provide An Earnings Lift?

Major stock market indices continue to reach all-time highs on what now seems to be a regular basis. There has been much debate and speculation about what this means, and where the markets will go from here. While many pundits are calling for a pullback, we at Meeder believe this secular bull market still has “Room to Run.” There are several factors that could propel this market upward.

The President-elect has vowed to make it his mission to bring jobs and business back to the United States. He has said that he will accomplish this by potentially exercising tariffs to discourage companies that try to take their products outside the U.S.

Another way for corporations to improve their balance sheets may come in a more unconventional manner. Businesses may get some help from legislators in Washington D.C. One of the major themes of the President-elect’s campaign centered around putting the U.S. economy in a position to be more competitive on a global scale. One way to accomplish this is to decrease corporate tax rates. According to TaxFoundation.org, the U.S. currently has one of the highest marginal corporate tax rates in the world at 38.9%. This includes a 35% Federal rate plus an average 3.9% state income tax rate. Only the United Arab Emirates at 55% and Puerto Rico at 39% stand ahead of the U.S. in a list of over 188 countries for the tax year of 2016.

Distribution of Worldwide Corporate Tax Rates, 2016

The President-elect has stated that he wants to cut the corporate tax rate to 15%. Republican congressional leaders, including House Speaker Paul Ryan, have called for a rate reduction to 20%. Regardless, either of the proposed reductions could create a substantial boost for markets. Investors would see improved financial strength that should result in equity valuations of these companies rising, due to their respective savings from taxation. In the exhibit below, Ned Davis Research has illustrated different scenarios and the impact that reduced corporate tax rate could have on earnings growth moving forward. 

Potential Tax Reform

The new administration is also exploring the possibility of a repatriation tax holiday, where U.S. companies could take earnings that they have accrued outside the country, and bring those back into the U.S. economy at a more favorable tax rate. Ned Davis Research estimates that there is $2 trillion in earnings that could be brought back domestically. Historically, companies that take advantage of this opportunity often use the funds for multiple purposes, including capital expenditures, or share buy backs, which would be an additional source of earnings growth.

To learn more about other catalysts that we believe could give this current secular bull market “Room to Run,” please contact your Meeder representative today.

Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios or holdings are given as of the date provided and are subject to change at any time. No offer to sell, solicitation, or recommendation of any security or investment product is intended. Certain information and data has been supplied by unaffiliated third-parties as indicated. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the information or materials offered by third-parties.

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