Guess What? The Market Stopped Believing In Tax Reform A Long Time Ago

Now that the bid to “repeal and replace” has failed miserably (and hilariously), proving that perhaps “the Donald” isn’t such a great dealmaker after all, the next logical question is what happens to tax reform.

For his part, Paul Ryan had this to say Friday afternoon:

  • Health bill failure makes tax reform more difficult
  • House Republicans will proceed with tax reform, although the defeat of legislation to repeal Obamacare “clearly makes it more difficult,” House Speaker Paul Ryan says at news conference after pulling health-care bill.

As we showed earlier, the more “tax reform” chatter the better for stocks and the failure of the health care bill means that going forward, any news about tax cuts isn’t likely to be good news.

But as it turns out, investors have been fading the tax reform promise for quite some time now. Here’s Goldman:

The boost to S&P 500 earnings from a lower corporate tax rate is likely to be smaller and to occur later than investors originally expected. The House Republican blueprint proposes a reduction in the statutory federal corporate tax rate to 20% from the current 35%. We estimate that a 5 pp reduction in the effective tax rate would boost ROE by 100 bp and lift S&P 500 EPS by about 6%. However, our Washington, D.C. economist expects the tax rate will be cut less than proposed to roughly 25%. Investors have also reduced expectations for the timing and size of tax reform. After outperforming the S&P 500 by 520 bp post-election, our basket of stocks with the highest effective tax rates (GSTHHTAX) has given back all of its post-election gains in the last three months (see Exhibit 1).


So much for #MAGA, right?


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