After President Donald Trump’s surprise election win, the Wall Street community got excited about one idea: tax reform.
During his campaign, Trump pledged to cut the U.S. corporate tax rate to 15% from 35%, a move that would prove a boon to the bottom lines of many corporations. As we noted last year, analysts saw this lower rate adding as much as $180 billion to S&P 500 earnings.
At the end of 2016, many saw tax reform as a spring 2017 issue and one of the first legislative areas the Trump administration would focus on. It is now September 2017 and on Wednesday afternoon, Trump will reportedly outline a tax blueprint which Politico notes will bill the plan as “one of the biggest tax cuts in recent American history.”
And while expectations for what tax rates would eventually be cut to — for instance, top-line corporate tax rates are now seen falling to 20% from 35% — have come down, a change in the tax code is still an idea that investors are keying off.
In a note to clients earlier this week, David Kostin’s equity strategy team at Goldman Sachs wrote that “investor expectations for tax reform are rising.” Notably, stocks with high tax burdens have outperformed relative to the broader market in recent weeks after underperforming for most of the year as investors saw tax reform as unlikely.
Kostin’s colleagues at Goldman’s U.S. economics team wrote late Tuesday that, “tax reform is finally starting to move and recent developments suggest a rising probability that tax legislation will be enacted by early 2018.”
Over at UBS, Paul Donovan writes that, “Trump is to deliver an awfully big speech on [tax reform] today.”
Yet with investor expectations high, it is worth wondering why Wall Street sees now as a time for something to get done, all things considered.
Will Trump actually make progress on tax reform this time?
On Monday, policy expert Greg Valliere of Horizon Investments said that Trump was facing an “exceptionally difficult” week, noting that, among other things, Trump’s tax plan is still months away from having any chance of becoming a reality.
“The simple fact that House tax writers aren’t ready to unveil legislative language this week, just a summary,” Valliere notes. “And even a summary has divided the GOP – will the bill reject any tax breaks for the wealthy? How much will the bill cost? What about effective dates? These and dozens of smaller issues have not been resolved, which is why enactment of a tax bill is still months away.”
And this observation came even before the Tuesday afternoon collapse of the latest effort by Republican senators to repeal Obamacare, which has so far completely preoccupied legislative efforts in Washington, D.C. and been fruitless.
So while Trump’s business background and supposed skills as a dealmaker have been touted by the investor community as reasons for optimism in the Trump era, his legislative success provides little basis for optimism right now.
Indeed, Donovan adds in his note that, “There is a risk that Trump will use today’s speech to rally his support base with inflammatory comment.”
“Trump’s candidate in the Alabama Republican primary was defeated by a large margin,” Donovan writes. “The latest health care reform proposals have failed to gain Senate support. Distractions with domestic (anti-business) rhetoric or with international (geopolitical/trade) rhetoric would impact markets.”
And with Puerto Rico reeling from the impacts of Hurricane Maria and Trump having just spent an entire weekend railing against professional athletes, one wonders where renewed optimism on tax reform comes from. Perhaps it is a simple belief that a total lack of results can’t last forever.
—
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
Read more from Myles here: