As 2017 winds down recent economic developments have heated up. Let's dive in.
Only time will tell what the ultimate impact of the tax bill will be. There is little doubt however that the reduction in the corporate tax rate from 35% to 21% will be beneficial. At 35% the U.S. had the highest corporate rate in the developed world. The 21% rate will make U.S. companies much more competitive on a global scale. A recent trend was for companies to move their headquarters out of the U.S. to countries with lower tax rates. With the new 21% rate there should be a dramatic reduction in these corporate inversions.
Another very positive change was reducing what has been called the repatriation tax. Under existing law companies have paid the 35% tax rate on profits they had made overseas that they brought back to the U.S. This tax was in addition to companies paying taxes to the country in which the profits were earned. The tax bill reduces this rate to 15.5% and going forward the U.S. will not tax foreign profits brought back home. Estimates are that there is anywhere from $3 trillion - $5 trillion in cash that could be brought back into the U.S. by this change.
The ink is not even dry on the tax bill and we are already seeing companies reacting positively to the passing of the bill:
AT&T has announced that due to the tax bill passing Congress they are giving 200,000 employees an immediate $1,000 bonus and they will be spending an extra $1 billion in capital expenditures.
FedEx's Chairman Frederick Smith said that the tax bill will prompt the company to increase hiring as well as new business spending as the tax cut will give them an extra $1.3 billion in profits.
Fifth Third Bank announced that with the passing of the tax bill they will be raising minimum wage at the bank to $15/hour and will be giving over 13,000 employees a $1,000 bonus.
The New York Fed just raised their 4th Quarter GDP estimate to 4%. This is coming on the back of 3Q GDP rising at the fastest level in 3 years. A narrative by some economic analysts in 2016 was that the U.S. economy had entered a new normal where GDP growth couldn't exceed 1.5%-2%. We have seen this year that pro business policies have buried that narrative. We expect GDP growth to continue above 3% in 2018.
Since the election in 2016 a common theme has been a major increase in confidence in the economy both by consumers and businesses.
U.S. Consumer Confidence just hit a 17-year high in November as U.S. consumers are more and more confident in the economy and the jobs market. This increased confidence has led to a major increase in U.S. retail sales. Holiday spending is off to a fantastic start.
It isn't just the U.S. consumer whose confidence is soaring:
The NFIB's Small Business Optimism Index hit a 34-year high in November. Small business owners are the top job creators in the U.S. so this is a very positive development.
U.S. Homebuilder confidence hit the highest level since 1999. New home sales also recently hit their highest level since 2007.
The final number for 2017 earnings growth will not be known until 4th Quarter numbers are reported by companies in January and February, but based on real numbers in 1Q, 2Q, 3Q as well as 4Q estimates, 2017 earnings growth for the S&P 500 will be close to 12%.
Earnings growth has been a significant driver of U.S. stocks in 2017. The earnings outlook for 2018 is also very strong and with the passage of the tax bill some analysts are expecting 13%-15% earnings growth.
The U.S. economy has heated up in 2017 with consumer and business confidence soaring and strong corporate earnings growth exceeding expectations. The passage of the tax bill will mean lower tax rates for many U.S. companies which will lead to higher earnings in 2018. However, one factor that will be critical to market returns in 2018 will be the movement in interest rates. We will address this issue and more in an upcoming post. Merry Christmas.