There’s no doubt the stock market was getting excited about the impending tax reform. As we’ve discussed before, Corporate America and small-to-intermediate businesses are expected to be the biggest beneficiaries of the Trump administration’s tax reform plans. However, rumblings that the Senate may shelf the tax bill rattled the stock market a bit last week, with the S&P 500 falling about 0.35%. In today’s blog, we’ll discuss what this all means for your investments…
In my opinion, all this was all likely "beltway gossip." The GOP leadership knows they have to pass something or risk losing the 2018 mid-term elections. Interestingly, the folks in Blue States with lots of itemized deductions from deducting excessive state income, property taxes and mortgage interest seem to be the biggest losers of the proposed tax reform. They are often hit with Alternative Minimum Tax (AMT) and cannot utilize all their deductions.
Given that the proposed tax bill calls for limiting mortgage interest deductions to only $500,000 mortgages and property tax deductions to only $10,000, it is not very real estate friendly. However, it will likely be a boon for the stock market, since the new tax bill may cause investors to divert more into the stock market and invest less in their homes. Overall, tax simplification seems to be the real goal of the new tax plan.
Along with tax reform rumors, third-quarter earnings announcement season also impacted the broader indices’ overall performance last week. About 90% of the companies in the S&P 500 have announced third-quarter results, so far. Average sales growth is running at a 5.9% annual rate and average operating earnings are growing at an 8.3% annual pace. That’s significantly higher than analysts’ estimates, as many were expecting third-quarter earnings to significantly decelerate from the first two quarters of the year. But thanks to stronger-than-expected sales growth, the third-quarter results were a pleasant surprise.
Looking forward, the analyst community is expecting the S&P 500 to post annual fourth-quarter sales growth of 5.4% and annual earnings growth of 11%. In other words, earnings are expected to re-accelerate, which is a very bullish signal.
If you’re wondering how your favorite stocks are handling this news, run them through my Portfolio Grader system. With an easy to understand A to F rating system, Portfolio Grader helps you discover all you need to make a determination regarding every stock in your portfolio. Of course, after using Portfolio Grader, stay tuned into this blog to discover my most recent insights regarding stocks and investing.