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As the debate continues over who will benefit most from the Trump administration's tax reform plan, one clear winner will be corporate America's bottom line.
How much that translates into in raw numbers, of course, will depend on the final rates that Congress plugs in as it debates the proposal. However, estimates being tossed around by Wall Street analysts have companies overall getting an extra 7 to 12 percent boost in profits, with some banks reaping 25 percent growth above current estimates.
As companies adjust to the possibility that they will get a break from the highest nominal corporate tax rate in the world, investors will be watching closely to see the effect on earnings.
"Tax reform could boost corporate earnings substantially, but the effect on the aggregate US equity market, and the distinction between winners and losers, will depend on details that remain to be negotiated," Ben Snider, an equity strategist at Goldman Sachs, said in a report for clients. "Recent stock market performance suggests investors are already pricing some optimism regarding tax reform."
Indeed, the latest leg of the second-longest bull market run in history appears to have been fed in part on hopes that Washington finally is making progress toward if not total tax reform at least some relief.
The White House's current proposal calls for lowering the corporate rate from 35 percent to 20 percent while also levying a one-time tax on profits stashed overseas and providing full expensing for capital expenditures.
While President Donald Trump has emphasized the importance of making the U.S. more competitive globally as he has pushed for lowering rates, the obvious ramification is that companies will get to keep more of what they make.
In real terms, Snider estimates that 2018 earnings for companies will get a 12 percent lift so long as Congress goes along with the administration's proposal, even though it's likely to increase the budget deficit at least in the near term. Bank of America Merrill Lynch also released an estimate this week, figuring that the new rate would boost earnings by about 11 percent in 2018.
"A major impediment to the adoption of this plan is that the potential deficit increase may be above what the Senate and House are willing to accept," Snider wrote.
Trump and other White House officials say they will negotiate other parts of the proposal but not the 20 percent rate.
So assuming the 20 percent rate goes through, Snider said that will have multiple benefits: In addition to the basic earnings boost, that would raise the multiple at which the market is expected to trade and in turn boost the S&P 500 to 2,650, about a 5 percent lift from its current level. (Goldman has been pessimistic about big market gains, with the firm's current forecast indicating that the index actually will fall more than 5 percent by the end of 2017.)
Goldman also believes the plan will offer a boost of 0.2 percentage point to the economy in 2018.
"Economic theory would also suggest that competition should eventually lead firms to
pass through some benefits of tax reform to customers in the form of lower prices," Snider said. "This would reduce the boost to earnings from a tax cut but would likely take time to occur."
When it comes to taxes, the formula gets a little trickier for banks. Questions over interest and expense deductibility, how much the plans would impact loan growth and some other nuances make the math harder to calculate.
However, large banks likely would see 2018 earnings per share jump by 12 to 20 percent, while midcaps would see growth of 15 to 25 percent, according to Kevin St. Pierre, senior analyst at AB Bernstein.
"The banks with higher effective tax rates would likely be the biggest beneficiaries, but it remains to be seen how tax credits are handled and what the impact would be on banks paying below-average tax rates today," St. Pierre said in a note.
"Details on the suggested shift to a territorial regime (vs. worldwide today) also need to be ironed out — and it's tough to know how this would affect overall tax rates for banks with sizeable foreign exposure," he added.
The territorial part of the plan would see a one-time tax levied on companies' profits stashed overseas, a total estimated at $2.5 trillion, in an effort to get that cash repatriated back home. The effective tax rate, which is what companies actually pay after deductions, is also a critical part of determining benefit.
Banks' effective tax rates range from 25 to 35 percent, so the ones at the higher end of the tax scale would receive more benefit. The rate varies significantly on banks in St. Pierre's coverage universe:
"Some banks (HBAN, FITB, PNC, KEY) operate close to ~25% effective tax rates today," St. Pierre wrote. "One reason for their lower effective tax rates is that they leverage on the tax credits and tax-exempt income that the tax code currently offers.
"With the reform framework relaying a special emphasis on retaining the low-income housing tax credits, we believe banks could retain some of their tax credit benefits, and potentially run at effective tax rates below the headline 20%."
He also points out that the effective tax rate for the entire S&P 500 is 26 percent, and estimates that the index would see an 8 percent earnings gain.
Relative to other sectors, then, the gain for large-cap banks would be in the 4 to 12 percent range while small-caps would see a benefit of 7 to 17 percent.
Bank stocks took off after Trump's election on hopes both for tax reform and less regulation. However, the sector, as measured by the SPDR S&P Bank ETF, has surged nearly 13 percent since hitting its 2017 low Sept. 7. The ETF is up 3.3 percent year to date, lagging the S&P 500's 13.4 percent gain.
Correction: The White House's current proposal calls for lowering the corporate rate from 35 percent to 20 percent. An earlier version misstated the rate.