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Tags: donald trump | earnings | profit | company

Earnings Expectations Soar in Trump's Brave New World

Earnings Expectations Soar in Trump's Brave New World

(Dollar Photo Club)

Dr. Edward Yardeni By Tuesday, 13 December 2016 08:56 AM Current | Bio | Archive

Raising Our Earnings & Market Estimates

Yesterday, Joe reported that S&P 500 earnings will get a big boost from Trump’s corporate tax-cut plan if it is enacted by Congress.

We’ve been so busy writing about the various economic proposals of the incoming new administration that it hadn’t dawned on us until this past weekend that we need to actually raise our earnings estimates for 2017 and 2018. That’s based on the assumption that the statutory corporate tax rate will be cut from 35% to 15% sometime next year.

We’ve been also assessing the likelihood of Trump’s various economic proposals. The tax cuts look the most likely to be implemented, and relatively quickly. Even if they aren’t enacted until next summer, they most likely will be retroactive to the beginning of 2017.

So without any further ado, we are raising our S&P 500 operating earnings estimate for 2017 from $129 per share to $142 (on a Thomson Reuters basis). For 2018, our estimate is now $150, up from $136.75. Following the anemic earnings growth of 0.9% during 2016, we now expect growth of 19.8% in 2017 and 5.6% in 2018. Consequently, we are also raising our 2017 target for the S&P 500 from 2300-2400 to 2400-2500.

Consider the following:

(1) Trump P/E melt-up anticipating higher earnings. The vertical ascent in stock prices since Election Day reflects the realization by investors that earnings will get a big and permanent boost from lower corporate tax rates. A reduction in the regulatory burden promised by Trump also will boost earnings, though that’s harder to estimate. In any case, forward P/Es have soared on expectations that industry analysts soon will be raising their earnings estimates to reflect lower taxes and regulations. Once those estimates are raised, forward P/Es might come down a bit or at least stop going up. In other words, the Trump melt-up so far might be well justified by the outlook for earnings if corporate tax rates are cut. In addition, personal income taxes will be cut, which will be good for sales and earnings.

(2) Why haven’t industry analysts been raising their earnings estimates? Why haven’t investment strategists been doing the same? They all are waiting for the President-elect to move into the White House. Then we all will have a better idea of what is in store for the obligatory “first 100 days” of frenetic policymaking. What will the administration actually propose? How will Congress change the proposals? What will be the actual outcomes?

We aren’t waiting. We agree with the market that significant changes are coming, and they will most likely be good for the economy, business, earnings, and stock prices. Meanwhile, we will be tracking the consensus earnings expectations of industry analysts for the S&P 500/400/600 for 2017 (Fig. 1 and Fig. 2). So far, there is no sign that their earnings estimates reflect Trump’s 8/8 campaign speech to the Detroit Economic Club on his economic plan, which was also outlined in his 10/22 “Contract with the American Voter.” Consensus expectations haven’t changed much for next year’s quarterly earnings growth rates. For the S&P 500, they are currently 13.7% y/y for Q1, 10.5% for Q2, 9.7% for Q3, and 14.5% for Q4.

During the week of December 8, industry analysts estimated that S&P 500 operating earnings will be $132.63 per share in 2017 and $148.16 in 2018, yielding growth rates of 12.2% and 11.7% (Fig. 3). We compare their estimates to ours in the YRI S&P 500 Earnings Forecast. If and when industry analysts conclude that they know enough to raise their earnings estimates as a result of Trump’s tax cuts, forward profit margins are likely to show significant increases to reflect the tax cuts (Fig. 4). Looking at the profit margins for the S&P 500/400/600, we see some signs that this may be starting to happen for the S&P 400 MidCaps, but not for the SmallCaps and the LargeCaps.

(3) Joe did the math on earnings yesterday. In case you missed it, here is the relevant excerpt from Monday’s Morning Briefing: “I asked Joe to look at the impact on S&P 500 earnings of a cut in the corporate tax rate to 15%. Using available annual data, he determined that the effective rate was 27.5% during 2015 (Fig. 5). During the past decade, S&P 500 earnings slowly benefitted from lower interest expense and share buybacks. A cut in the tax rate would yield an immediate and permanent benefit to S&P 500 earnings. The consensus currently estimates S&P 500 earnings will be around $132 per share in 2017. Using 2015’s effective rate of 27.5%, each percentage-point decrease in the effective corporate tax rate would add $1.82 to consensus 2017 earnings. A 5ppt reduction in the tax rate would add $9.10 to earnings, and a 10ppt reduction would add over $18, or nearly 14%, to earnings. The bottom line is that the ramifications of a tax-rate cut are significant and could reprice the S&P 500 index even higher.”
To be clear, our new post-election $142 estimate for 2017 is based on our pre-election estimate of $129 plus $13 resulting from a combination of tax cuts and lower regulatory costs. Our new estimate now exceeds the analysts’ current estimate of $132, which certainly doesn’t reflect the likelihood of a tax cut yet.

By the way, while Joe figures that the effective tax rate for the S&P 500 was 27.5% during 2015, it was 25.0% for all corporations during Q3 of this year based on data provided along with GDP in the National Income & Product Accounts (Fig. 6). Both measures include federal, state, and local taxes.

(4) S&P and DB have similar estimates for tax-cut impact on earnings. A 12/1 article posted on CNBC.com reported: “In an analysis released Thursday, S&P Global Market Intelligence estimates that, in a perfect world, the impact of slashing the highest-in-the-world U.S. corporate tax rate could be a nearly immediate 11 percent boost to the market. …. The effective tax rate, or the one that companies in the S&P 500 actually pay after deductions, is 29 percent, according to S&P. ….

“According to what were termed ‘back-of-the-envelope calculations,’ the ramifications go something like this: Current expectations for 2017 S&P 500 earnings indicate growth of 11.8 percent, or $131 per share. So each 1 percentage reduction in the corporate tax rate would add $1.31 to anticipated earnings. A 5 percent reduction would bump up earnings by $6.55, while a 10 percent cut would boost EPS by $13.09. That would translate into respective earnings gains of 17.4 percent and 23 percent.”

Also on this subject, a 11/21 article in Bloomberg reported: “Deutsche Bank Chief U.S. Equity Strategist David Bianco believes that investors are under-appreciating the ‘much higher chance now of a long lasting economic expansion that rivals the 10-year U.S. record.’” Bianco thinks the likelihood that the Trump administration will cut corporate taxes will be a major stimulus to the bottom lines of US companies. According to the Bloomberg article, “Deutsche Bank estimates that the U.S. corporate tax rate will be cut to about 25%--which would bring it in line with the Organization for Economic Cooperation and Development (OECD) average--and suggests that every five-percentage point cut lifts the earnings per share of S&P 500 companies by a cumulative $5.00.”

(5) The downside for earnings may be higher interest rates and an even stronger dollar. Of course, Trump World may not be a perfect one for earnings. Corporate bond yields have already increased by about 80bps since their record lows during early July of this year (Fig. 7). The JP Morgan trade-weighted dollar is up 24% from its July 2014 low, and could conceivably rise by another 10% (Fig. 8).

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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We’ve been also assessing the likelihood of Trump’s various economic proposals. The tax cuts look the most likely to be implemented, and relatively quickly. Even if they aren’t enacted until next summer, they most likely will be retroactive to the beginning of 2017.
donald trump, earnings, profit, company
Tuesday, 13 December 2016 08:56 AM
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