The bull market in U.S. stocks is already almost nine years old and the second longest since World War II, but there are no signs it will end anytime soon.
Wall Street strategists are forecasting further gains in 2018, ranging roughly between 4% and 10% for the S&P 500, underpinned by a growing economy and strong earnings growth, with many raising their estimates for both following passage of the tax bill, which slashes corporate rates beginning next year. But even the most optimistic forecast of a 10% gain is just half the runup in the S&P 500 this year.
David Giroux, portfolio manager of the T. Rowe Price Capital Appreciation Fund, said the corporate tax cut, from 35% to 21%, could provide a onetime boost in S&P 500 earnings of 6% to 8% in 2018 on top of an already expected 5% increase. That, in turn, would reduce the price-to-earnings ratio of the index from 19 to 18 times earnings, making the index a little less pricey.
Others like Paul Eitelman at Russell Investments expect a smaller bump up in earnings due to tax cuts because many companies, especially large-caps, don’t pay rates near 35%.
None of the 11 major S&P 500 corporate sectors pay an effective tax rate above 30% except telecom (34%), according to data from Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. The tech sector has an effective rate of just under 19%, while health care is near 22% and financials and consumer discretionary sectors near 28%.
“We still have to see what kind of impact the tax cuts will have on corporate profits,” says Sam Stovall, chief investment strategist at CFRA.
That impact is expected to be a mixed bag, generally favoring companies whose profits are heavily sourced in the U.S. and taxed in the U.S., which are largely small- and mid-caps, and who carry relatively light debt loads. “While 2017 was the year of large-caps, 2018 could be the year of small-caps,” says Stovall.