In a new quarterly letter to Grantham Mayo Van Otterloo’s institutional clients, chief investment strategist Jeremy Grantham predicts corporate margins — and hence (probably) the market in 2017 — will likely move up this year.
“Unless there are some substantial unexpected negatives, U.S. corporate margins will be up this year, making for the likelihood, in my opinion, of an up year in the market at least until late in the year,” Grantham writes. “This does seem to make the odds of a major decline in the near future quite low (famous last words?). Next year, though, is a different proposition.”
Grantham says there are three factors moving in favor of U.S. profit margins this year.
First, he says, oil and resource prices appeared to have bottomed out last year and “seem likely to have favorable comparisons for a few quarters.”
According to Grantham, rising oil prices have a short-term effect of about one year of boosting profits and vice versa because oil company profits quickly respond and the much more thinly spread benefits cause profits to move in the opposite direction, but much more slowly.
The second factor moving in favor of U.S. profit margins is related to President Donald Trump’s tax agenda.
According to Grantham, Trump is likely to settle for a “moderate reduction” in corporate tax rates this year after bouncing off the “infinitely complex task of a full redo of the tax code.”
“In a theoretical world, corporate taxes are a pass-through to consumers, but in the current, stickier, more monopolistic, more profit-fixated world, a corporate tax reduction will raise corporate profits for quite a while from where they otherwise would have been,” Grantham writes.
The third factor involves Trump’s order to reduce regulations.
At the end of January, Trump signed an executive order to require federal agencies to propose deleting two regulations for each new one they issue, and also said his administration plans to do a “big number” on the Dodd-Frank Wall Street Reform and Consumer Protection Act.