The US president has just announced its eagerly awaited tax reform. Since American stocks have become very expensive, it is important to question anything that may impact the earnings of listed companies. Given the importance of Wall Street for the other market places,this is more than just an US issue. At first glance, lowering corporate taxes from 35% to 20% should boost profits. Yet with the effective tax rate for listed companies so far from the theoretical rate, the reality is not nearly so black and white. Plus, we are seeing major disparities, according to business sector, the share of international sales or the size of the companies. Against this backdrop, a global view can be misleading. Ultimately, according to our calculations and estimates, only four sectors out of ten should really benefit from the decline in the tax rate: Telecom, Health Care, Consumer Discretionary and Consumer Staples. Three other sectors, Industrials, Energy and Materials, are also expected to benefit, but to a lesser extent. Finally, three sectors - Utilities, IT and Financials - are in a specific situation which means that they will not really benefit from the tax cut. There is clearly a strong relationship between the percentage of sales in the United States and the rate of taxation: the more a sector is international and the lower its tax burden is. This is particularly the case for the IT sector. As for the Utilities, this sector is very domestic (95%) but little taxed: in return for their regulated income, their possibility of deduction was hitherto very broad. Lastly, with regard to the Financials, if their average tax rate over the period 2007-2016 was close to zero (6%), this reflects the deterioration in their profitability at the beginning of the Great Financial Crisis (2008-2009) and the generation of significant deferred tax credits since then. Note that domestic stocks and small- and mid-caps should benefit from the tax cut.
Only time will tell whether the announced tax return will make it through Congress. If the key points of the plan are upheld, the impact on listed company earnings would be more limited than it appears, given the massive gap between the theoretical corporate tax rate - 40% including local taxes - and the effective rate - 25% on average from 2007 to 2016 - (see graph). As mentioned above, pay attention to the specificities of the sectors though.
For further details, please refer to the next monthly cross asset (November 2017), to be published next week
The US president has just announced its eagerly awaited tax reform. Since American stocks have become very expensive, we have focused on what could impact the earnings of listed companies. Given the importance of Wall Street for the other market places, this is more than just an US issue. At first glance, lowering corporate taxes from 35% to 20% should boost profits.
US corporate profits declined -6.8% at annual rate in Q4 2015 vs Q3 of the same year, according to Bureau of Economy Analysis data (profits before taxes with inventory valuation adjustment).Most of this decline is due to the petroleum & coal sector, whose profit declined $124 bn, and tonet overseas profitsthat fell $6.4 bn.Domestic profits excluding petroleum and coal declined only -1.7% a.r, or $38.8bn.
CFA, Strategy and Economic Research at Amundi
As the earnings season comes to a close, the time has come to report back on what we have found. With double-digit earnings growth in all the developed regions and substantial revisions to EPS, the season came out largely as promised. Between now and the end of the year, delivering surprises will be more difficult. Against this backdrop, the eurozone, where the recovery continues and where the bases for making comparisons are favourable, should offer strong opportunities.