While the permanent 21% corporate tax rate in the new Tax Cuts and Jobs Act is boosting earnings forecasts for 2018, investors should curb their enthusiasm about what that means for stock prices in the long run, according to David Kelly, chief global strategist for JPMorgan Funds.
Kelly laid out in his Tuesday commentary five reasons for investors to not get their hopes up about the new corporate tax rate’s long-term impact on stock prices.
He also sees the “beta” play in stocks over the past year, with stocks soaring in anticipation of tax reform and then rising further once it passed, now turning into an “alpha” play post tax reform, and he cautions that 2018 will not be “as positive for stocks in general as many believe.”
Under the new tax law, “every company is impacted differently depending on their previous tax rate, their asset holdings overseas, their capital spending plans, their interest costs, their R&D budget, their tax-loss and tax-liability carry-forwards and a host of provisions of the tax act,” Kelly explained.
Because tax reform “has shuffled the deck and given each company a new hand,” Kelly told ThinkAdvisor in separate comments, “this is a great opportunity for fundamental investing.”
The alpha opportunity exists, he said, “for those investors and fund managers who can most accurately and quickly assess the value of these new hands.”
Forecasts of 2018 earnings “now stand at $150.57 for the full year compared to $145.80 just three weeks ago and $144.71 at the end of September 2017,” Kelly said.
The “sharp upgrade” in earnings forecasts is “almost entirely” due to passage of the new tax law. However, as Kelly explains, the following factors about the new tax law should dull investors’ enthusiasm:
1. The scale of the corporate tax cut, in total, is actually modest.
The net cost to the federal government of the corporate tax cut, once the repatriation tax is included, is $329 billion over 10 years or $33 billion per year. This is less than 2% of the roughly $1.8 trillion that U.S. corporations are expected to make after taxes in 2018.