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Since the election, investors have focused on whether or not a tax bill would get through Congress. With successful votes in the House and Senate, attention is now shifting toward economic and market implications. Even after the President signs tax reform into law, company-level implications will remain unclear for quite some time. The only certainty is that investors will be left with greater uncertainty on the trajectory of corporate earnings and cash flows for 2018-19. As such, we believe the market will focus on four key issues over the near term:
1) Effective Tax Rate. While the current statutory rate is 35%, companies are paying only 27% on average. While specifics are unclear, investors are presuming the new effective rate will move toward 20%. If the change goes into effect in 2018, consensus EPS would jump from $146 to $160.
2) Potential Upside. Historically, investors have rewarded revenues and EBIT margins more than taxes. As such, we would expect much—but not all—of the improvement in EPS to pass through to stock prices. The exhibit below highlights that the tax benefit has not yet been fully realized.
3) Greatest Beneficiaries. Given that the full extent of tax reform is difficult to ascertain, we recommend that investors focus on relative beneficiaries.Lists of potential winners and losers are highlighted on pages 59-66.
4) Economic and Second Order Effects. The full impact of the new tax code is impossible to calculate given yet unknown behavioral changes.
These include the use of repatriated assets for capex, buybacks, and M&A, as well as the stimulative benefits to consumer spending.
20171205-CREDIT_SUISSE-U.S.EQUITY_STRATEGY：EQUITY_STRATEGY_NAVIGATOR-634350.pdf
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