Investment Implications of the New Tax Law

The new tax law has important implications for major corporations, small businesses, and individual taxpayers, and will likely shift the trajectory for economic growth, the federal budget, monetary policy, and perhaps most critically for investors—corporate profits.

The $1.5 trillion tax cut is a complex, 1,000-page law intended to spur economic activity through a reduction in both individual and corporate tax rates, and simplify the tax code by eliminating or trimming a variety of deductions and exemptions.

  • According to the Joint Committee on Taxation, individuals should receive an estimated net tax cut of $1.15 trillion, or about 77% of the package, a greater focus on individual tax cuts than the original House bill.
  • The estimated net tax cuts for U.S. businesses total around $330 billion, or 23% of the overall package.

While concerns proliferate relative to deficit spending and potential inflationary impacts, the Joint Committee on Taxation projects the changes will add roughly +0.7% annually to gross domestic product (GDP) over the course of the next decade, and that U.S. consumers may be poised to reap over $120 billion in 2018 and $200 billion in 2019, more than 1.0% of GDP. Considering the lower corporate tax rate (from 35% to 21%), immediate expensing, and repatriation of foreign sourced profits, businesses may have approximately $80 billion over each of the next four years to distribute between shareholder friendly activity and capital expenditures.

Per John Lynch, Chief Investment Strategist, “Given the benefits of the new tax law to personal consumption and business investment, we have raised our projections for annual U.S. economic growth to a range of 2.75–3.0% over the next year. We believe market interest rates are likely to rise, though, as less support from the Federal Reserve combines with concerns over deficit spending and the inflationary impact of providing stimulus to an economy with already low unemployment rates. We expect the 10-year Treasury to trade within a range of 2.75%– 3.25% over the course of the next year. Finally, we have increased our forecast for S&P 500 Index profits from $142.50 to $147.50 in 2018, and believe the index will be fairly valued in the range of 2,850– 2,900 by year-end.*”

For a detailed summary of the new tax law changes, click here.

IMPORTANT DISCLOSURES

*Based on trailing 12-month price-to-earnings ratio (PE) of 19–20. Forecasts are from our Outlook 2018: Return of the Business Cycle publication.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index than cannot be invested into directly.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.

This research material has been prepared by LPL Financial LLC.

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