He’s not right about much and he’s not right very often, but Donald Trump’s contention that the inexorable rally in stocks would become, well, even more inexorable if only Republicans were allowed to shove a corporate tax cut up America’s already over-fucked ass seems to have been spot-on.
Of course it’s not entirely clear how much of the most recent leg up in stocks is attributable to a rational assessment of the benefits that are set to accrue to investors from the passage of the tax bill and how much of it is attributable to everyone simply trying to frontrun everyone else on the assumption that even if I don’t think the tax bill is going to be a bonanza for corporate bottom lines, the next guy sure does, so I’ll buy now assuming he’ll buy later.
Whatever the case, the rally has hit something that approximates escape velocity in the new year and according to BofAML’s Michael Hartnett (Mr. “Icarus”), $58 billion has flowed into stock funds in four weeks, the most on record.
That’s translated directly into an S&P that’s the most overbought in history:
As Goldman notes, this has been accompanied by a sharp upward revision to earnings estimates. To wit, from a note out Friday evening:
S&P 500 closed at an all-time high of 2810, up 13% since Labor Day and 5% YTD. We expect 2018 S&P 500 EPS will grow by 14% to $150, including a 5% boost from tax reform. Last year, stock analyst EPS estimates for 2018 remained largely unchanged until the legislation passed. Consensus bottomup estimates have increased sharply since December 20 and are now above our top-down estimate (see Exhibit 1). Investor enthusiasm for the economic and earnings growth benefits of tax reform has pushed stocks to new highs.
But here’s the thing. Goldman thinks maybe folks are getting ahead of themselves assuming that all of the benefits from the tax cuts are going to find their way to corporate bottom lines.
See, consumers and actual employees have to be taken into consideration as unfair as that is. I mean everyone knows that consumers and employees don’t matter and the only thing that counts are bottom lines and therefore shareholders but because life isn’t fair, not all of the benefits from the tax bill are going to go directly or indirectly into the pockets of shareholders. Here’s Goldman:
Competition for customers is one dynamic that may prevent the entire benefit of tax reform from accruing to corporate earnings. Industries and companies with low and volatile gross margins likely have limited pricing power and may see potential tax gains partially competed away. For example, the Transportation and Automobiles & Components industries may be forced to lower prices to stay competitive, thereby offsetting potential tax reform savings. On the other hand, some industries with better pricing power that otherwise might retain the incremental profits from lower statutory tax rates are in sectors such as Information Technology and Health Care that have low effective tax rates and will benefit less from tax reform.
As much of a bummer as that most certainly is, it gets worse. As it turns out, some companies might actually think about raising wages to pacify labor to the detriment of capital which is the exact opposite of what we should be doing as a society that cares nothing about equality. Here’s Goldman again:
Pressure is also mounting on executives to share tax savings with employees by increasing wages. Corporate profits as a share of GDP are just off their highest level since at least 1950 while labor as a share of GDP remains near its all-time low (Exhibit 3). In a recent public letter, BlackRock CEO Larry Fink urged executives to manage their firms for the benefit of all stakeholders, not just shareholders. Faster wage growth would be one action that firms could take to address economic inequality.
So you know, if the reason you’re buying hand over fist is in anticipation of fatter bottom lines courtesy of the tax bill, maybe take a step back and breathe for a minute.
If, on the other hand, you’re just buying on the assumption that there will be a greater fool willing to buy even higher, well then carry on because that seems to be a “fool”proof strategy – pun fully intended.