Tax overhaul to give another boost to record high US equities

18/12/2017 06:10 AST

The tax overhaul is likely to provide additional boost to US equities, which are already at their record high.

A sweeping legislation, which is expected to go to vote on Tuesday, is likely to overhaul the taxation system in the US. The corporate tax will be cut to 21 per cent from the earlier 35 per cent is one of the few the changes proposed under the new legislation, that would deliver $1.5 trillion in tax cuts over a decade.

Market participants say the tax cut will feed in the earnings growth of companies in the near-term, providing the continued underlying support to US equities. Earnings growth could exceed 15 per cent on year in 2018, if the corporate tax cut is fully phased in, according to UBS, which manages $2.8 trillion of clients money.

“The tax reform package could drive a further 6-10 per cent rise in corporate profits, comprised of a lower tax rate and the redeployment of overseas cash into higher returning assets,” Chief Investment Office wealth management of UBS said.

“Faster economic growth as a result of the tax cuts could also drive an increase in interest rates, which would benefit financial sector profits,” the UBS said in a monthly outlook.

Record spree

The Dow Jones Industrial Average has been on a record breaking spree due to higher than expected growth, and on the back of Trump Trades triggered by hopes of more than expected spending on infrastructure amid record low interest rates.

The DJIA has gained nearly 25 per cent since the start of the year, and on Friday the index hit another record at 24,689. The S&P 500 also managed to hit another record of 2,680, after gaining nearly 20 per cent since January.

Vaqar Zuberi, head of Hedge Funds at Mirabaud Asset Management said the US equities markets are riding a wave of strong growth in corporate profits, healthy levels of employment, continued low interest rates, and the potential of tax reform.

“Should the bill pass as expected, US equities markets are likely to respond positively, but with limited gains given the already substantial gains this year,” Zuberi said.

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