How Would a 20% Corporate Tax Rate affect the U.S. Stock Market?
Over the past many weeks it has become increasingly likely that a cut to the corporate tax rate in the U.S. to 20% will become a reality. What effect will this have on the U.S. stock market and how much of it has already been priced in? According to a study conducted by Thomson Reuters, a corporate tax rate of 20% (currently at 35%) would add 10.5% to the S&P 500 operating earnings consensus estimate. Based on Canaccord Genuity Chief Market Strategist Tony Dwyer's 2018 S&P 500 operating earnings estimate of $140 and price-to-earnings (PE) multiple of 20x, which we believe to be a fair forward PE ratio to value the current market, it would put a target level of 3100 for the S&P 500 Index by the end of next year. With the S&P 500 Index currently sitting at a level of 2650, this implies a return target of 17% for next year. The biggest beneficiaries of the tax cut would be the Energy and Financial sectors.
Source: Thomson Reuters I\B\E\S, Canaccord Genuity