Market Comment: US tax proposal: still relevant for investors

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On Friday, the US Senate has voted for the tax proposal of the Republicans. Maurits Heldring, our equity expert, believes most of the plan has already been priced-in in the stock markets, but expects earnings estimates to rise.

Another step towards tax reform

This vote is another step in the process of the tax reform, which should ultimately lead to the implementation of one of Trump’s biggest election promises. The plan is not there yet, however, as Maurits Heldring points out: “The US House of Representatives and the US Senate have individually been working on separate tax proposals. And both proposals should be merged into a joint tax proposal before the bill can be sent to President Donald Trump’s desk.”

 “The Republicans hope to agree on a proposal before the end of the year,” Heldring continues, “but it remains to be seen whether they will meet their deadline. A consequence of this time pressure could be that the final bill deviates from the version that was voted for last Friday. Also, the Republicans could face hurdles in the Congress in finding agreement about the bill, as achieving consensus has proven to be hard for them.”

US tax proposal mostly priced in

Main points of the US tax plan are a lower income tax, lower corporate tax rate and a repatriation tax, which are expected to support economic growth. Investors have been closely following this plan for a while now, which is reflected in the stock prices. Heldring: “We believe the tax plan has been mostly priced-in by now. The tax cuts are one of Trumps main election promises and Trump has been promoting them widely. Investors have been optimistically anticipating on the tax cuts and as such, the S&P 500 Index has gained some 25% since his election.”
 
Not everything has been anticipated though. Heldring: “We expect that most analysts will still need to adjust their earnings estimates for the lower corporate tax rates of some US companies, but not before the plan is definite. As a result, some companies that currently are subject to high tax rates, such as Wells Fargo and American Express, may expect earnings upgrades as soon as the tax reform proposal is final.” 

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