Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
Hoped-for tax reform & infrastructure spending will disappoint.
Stocks have surged to new highs since the election, from already very lofty levels, on the theory that the Trump Administration and Congress would create policies that would pile enormous benefits on Corporate America – and do so pronto. This includes, as President Trump called it, a “phenomenal tax plan,” deregulation for Wall Street and other sectors, and additional government spending, particularly a $1-trillion boost to infrastructure spending and some plus-sized moolah for the military.
Now the markets are counting on it. Stocks have soared. And everyone is happy. So why is Goldman Sachs dissing the rally with increasing intensity on a near-weekly basis?
Goldman shares have surged 58% since early October when it became clear to the markets that Trump had a chance. Some of its former executives are now dutifully holding down key positions in the Trump administration. Markets are expecting that all manner of goodies will rain down upon Goldman and the broader Wall Street community.
But Goldman’s analysts are worried about this market enthusiasm because those goodies may not show up, or show up late and in watered-down form once Congress gets through with them, if it gets through with them at all. And for any disappointment, there will be a price to pay….
Because tax reform may turn into a dud, according to Goldman economists led by Alec Phillips, in a note today.
The problem is the repeal of the Affordable Care Act. Republican lawmakers disagree among each other on whether to repeal it first and replace it later, or modify it instead, what to replace it with, or how to modify it. So this is going to be the Congressional mess that is typical for large legislative changes, rather than a quick thing. And it will drag out and get more complicated and more layered and consume the attention of the lawmakers and focus the attention of the American public.
“This process is likely to take longer than expected, which is likely to delay the upcoming debate over tax reform,” the Goldman economists wrote in the note cited by Bloomberg. “The difficulty the Republican majority is having addressing a key political priority suggests that lawmakers might ultimately need to scale back their ambitions in other areas as well, such as tax reform.”
But quick and substantive corporate tax reform is what the markets are counting on when they pushed the S&P index up 10% since the election. Now the efforts to deal with Obamacare may push corporate tax reform on the back burner, they said. And that would put those price gains at risk.
Yesterday, Goldman’s chief US equity strategist David Kostin warned in a note cited by Bloomberg about the consequences of such a disappointment: “Financial market reconciliation lies ahead,” he wrote.
According to his math, the S&P 500 index “will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected.”
The note points out that corporate earnings estimates for 2017 have actually been cut by 1% since November 8, even as the S&P 500 index has jumped 10%.
Goldman isn’t the only bank issuing warnings about the increasing riskiness of this bet. On February 13, after stocks had surged for three days straight in response to Trumps mere suggestion of a massive corporate tax overhaul, Cowen & Co analyst Chris Krueger warned that bulls are going to be disappointed with what the White House will put forward. It won’t be a substantive road map for Congress to follow.
It comes after Goldman economists, led by Alec Phillips, had warned in early February:
“Following the election, the positive shift in sentiment among investors, business, and consumers suggested that the probability of tax cuts and easier regulation was seen to be higher than the probability of meaningful restrictions to trade and immigration.
“One month into the year, the balance of risks is somewhat less positive in our view.”
“The recent difficulty congressional Republicans have had in moving forward on Obamacare repeal does not bode well for reaching a quick agreement on tax reform or infrastructure funding, and reinforces our view that a fiscal boost, if it happens, is mostly a 2018 story.”
This makes three weeks of regular warnings from Goldman and other banks that stocks have soared on a wing and prayer, with investors hoping for, and pricing in, something that may be forthcoming only belatedly, if at all, and only in much watered down form, and perhaps without much effect on corporate earnings after all, especially since the US corporate tax code, as it is, already provides companies countless ways to shelter their income.
So are stocks grounded in some sort of new reality? LOL. Read… S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since