Yesterday, prior to what might be considered the key speech of Trump’s presidency to date, Wall Street again soared to new record highs. Gains were made on growing confidence that the President’s sweeping tax reform bill will make it into law before the week is out and before the Christmas holidays. In a combative speech that was more ‘presidential’ in tone than we’ve perhaps seen since Trump’s election, the focus was again firmly on Trump’s ‘America First’ tagline. National security was central to Trump’s message but the tax reform bill was also firmly on the agenda. Describing it as a ‘Christmas present’, the President appeared to match the confidence markets had taken during the day that the bill would be passed within the next few days.
The S&P 500, Nasdaq and Dow Jones Industrial Average all closed Monday at new record highs yesterday. In the case of the Dow Jones, yesterday’s 70th record high of the year broke its previous record of 69, set back in 1995. Yesterday also marked the first time the index of the 30 largest companies in the USA has gained more than 5000 points in a calendar year. The S&P 500 recorded its 62nd record close of 2017 while the Nasdaq broke the 7000 points barrier for the first time in its history before closing just below. Trump bullishly stated yesterday that his government believe that the result of slashing the corporate tax rate to 21% from its current 35% will result in the repatriation of around $4 trillion of cash being held overseas by US companies. The top rate of individual tax will also drop to 36% from 39.6%.
With Trump’s promised tax reform now considered locked in regardless of whether the bill passes before Christmas or not, investor attention will now turn to what impact it can be expected to have on companies’ bottom lines. A US equities market that has been on a huge bull run this year especially, and on the up for several years now, had started to look like overstretching values. However, together with growing revenues, the 15% cut in tax on earnings could significantly change the price to earnings ratio of U.S.-listed companies, bringing them back towards historical averages and providing more room for growth in 2018.
Over in the UK, with the outlook of our own economy clouded by Brexit, those investing online may well be considering whether the tax reform boost means that a greater portfolio allocation to the USA is prudent. While UK equities haven’t performed badly this year, returning around 7% over 2017, they have significantly lagged the returns in the US, as well as many of Europe and Asia’s top stock exchanges. The question is now whether UK equities currently provide better long term value than other options or if the Brexit process will dampen growth over the next few years while competitor economies roar ahead.
There is still concern over how much longer the US rally can really last, despite tax reforms. Accendo head of research Mike van Dulken commented that “more updated guidance from US corporates, showing potential earnings improvement from the reform, will be closely watched.”
From the perspective of those investing online, that US markets will receive a further boost from the tax bill over the coming couple of months seems likely. The concern will be how much real impact the tax cuts will have to the profitability of companies in the longer term and if the resulting euphoria isn’t inflating a bigger bubble that will then have a bigger pop.