Readers will kept abreast of sector changes and such over the next 6 weeks of the quarter, but really all eyes should be on 2017 S&P 500 earnings estimates and the potential impact from not just personal tax rate reductions, but changes to corporate tax rates and the potential to bring back all those enormous cash piles held abroad by the likes of Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and such. (Long MSFT, client's largest position, and also long Apple.)
The first quantification I've seen in terms of the potential boost to S&P 500 earnings from the potential corporate tax rate changes comes from an article read on Seeking Alpha, written by "Fear & Greed Trader" who quotes a JP Morgan quantitative analyst. Here is a link to the article and here is the exact quote (about halfway through the article), cut-and-pasted for readers:
"There will be plenty of commentary from various analysts on how the proposals coming out of D.C. may or may not affect the economy and the stock market as we look ahead to 2017. J.P. Morgan's quant strategist Dubravko Lakos-Bujas predicted Trump's corporate tax cut has the potential to add as much as $15 to S&P 500 per share earnings."
Without being overtly political with clients, or having direct political conversations with clients on both sides of the aisle, I'm having a hard time containing my own bullishness about what this could mean for the S&P 500 in 2017.
Was the Thomson Reuters 2017 S&P 500 Earnings Estimate Predicting a Trump Victory last May '16?
To answer the question directly, probably not, but the Thomson 2017 S&P 500 earnings estimate was already expecting a pretty significant improvement in growth next year, a lot of which was the Energy sector. FactSet was predicting the same thing as well.
This growth could prove conservative, too, given the tax policies being considered and if the above quote from the JPMorgan quant analyst is even vaguely accurate.
This week's bottom-up Thomson estimate for the S&P 500 for 2017 was roughly $132, so add $15 and the Street is at $147 in EPS for 2017.
The S&P 500 closed Friday, November 19th, 2016 at 2,180, using a $147 multiple (and that is the only estimate I've seen in terms of the tax cut accretion) means the S&P 500 is trading at 14.8(x) next year's estimate.
My guess is this "tax-cut" estimate may only be figuring in cash used on buybacks, and may not include reductions of personal tax rates and that boost to consumer spending.
The point is, this is all very bullish for those old enough to remember the Reagan years, BUT this also remains a giant unknown, too.
The point of today's post is that - as we wait on expected tax cuts and corporate tax reform - 2017 was already looking pretty good just from an earnings growth perspective with 12% expected in 2017 before the tax cuts became a budding reality.
The FOMC may find themselves way behind any inflation curve, and with all of this stimulus coming down the pike next year, the pain in Treasuries could be excruciating, which was written about here and here.
Remain overweighted US equities - 2017 is looking like it could be a very good year.
Thomson Reuters data (by the numbers):
- Forward 4-quarter estimate: $128.47 vs. $128.43 last week - a sequential increase which is pretty unusual
- P/E ratio: 17(x)
- PEG ratio: 4.5(x)
- S&P 500 earnings yield: 5.89%
- Year-over-year growth of the forward estimate: +3.8% this week vs. +3.70% last week
Analysis/conclusion: This blog took some grief for readers in the last few months, expecting 12%-14% growth in the S&P 500 EPS estimate, and that may turn out to be very conservative. Q3 '16 earnings have been really very good, +3% overall and +7% ex-Energy per Thomson, with FactSet being slightly different but in the same area. FactSet also notes that Q3 '16 revenue is +2.7%, and +4.5% ex-Energy, which is the first quarter of y/y revenue growth since Q4 '14 (quoting FactSet).
Tomorrow, expect a post showing how Dodd-Frank impacted the Financial sector and thoughts on that expected regulatory reform.