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S&P: Trump tax cuts could produce 'eye-popping' market gains

Donald Trump
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Donald Trump

The Donald Trump tax cuts have potential to not only to help with corporate bottom lines, but also give a major boost to the stock market.

In an analysis released Thursday, S&P Global Market Intelligence estimates that, in a perfect world, the impact of slashing the highest-in-the-world U.S. corporate tax rate could be a nearly immediate 11 percent boost to the market.

Trump and his prospective Cabinet nominees have said the new administration will look to knock the corporate levy down from its current 35 percent to 15 percent. The effective tax rate, or the one that companies in the S&P 500 actually pay after deductions, is 29 percent, according to S&P.

"The implications for stock market pricing are potentially dramatic," S&P strategists said in a note.

According to what were termed "back-of-the-envelope calculations," the ramifications go something like this: Current expectations for 2017 S&P 500 earnings indicate growth of 11.8 percent, or $131 per share. So each 1 percentage reduction in the corporate tax rate would add $1.31 to anticipated earnings.

A 5 percent reduction would bump up earnings by $6.55, while a 10 percent cut would boost EPS by $13.09. That would translate into respective earnings gains of 17.4 percent and 23 percent.

Figuring that the index would continue to trade around 17 times the rate of earnings in the 12-month period "produces some eye-popping results."

Specifically, the 5 percent cut would generate a level of 2,340, or a 6 percent increase, while a 10 percent cut would push the index to 2,450, or 11 percent higher from current levels. S&P believes those levels can be achieved "sometime in the first quarter of 2017."

To be sure, the strategists emphasized that the projections are "simplistic" and "hypothetical."

However, the analysis jibes with recent sentiment from Wall Street. Goldman Sachs, for instance, released its 2017 outlook Wednesday that projected the S&P 500 to hit 2,400 in the first half, though the firm believes the market will retreat to 2,300 by the end of the year.

The index already has gained 4.7 percent since Election Day.

"We only mean to illustrate the potential significance that the discussion surrounding corporate tax reform could have on investor psychology and the level of 'animal spirits' within the broad economy and financial markets generally," the S&P note said. "We now await indications of how quickly the details of any forthcoming tax reform proposal can come together and how quickly and efficiently Congress can convert the proposals into legislation."