Bull market not dead as
tax reform takes spotlight
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[March 25, 2017]
By Rodrigo Campos and Chuck Mikolajczak
NEW YORK (Reuters) - The death of the
Republican healthcare reform may not prove to be the knife to the heart
of the bull market some had feared, but to keep the Trump Trade alive
investors should temper expectations for the breadth of expected tax
Anxiety over prospects for the healthcare bill gave stocks their largest
weekly drop since the November presidential election. But its failure to
pass could also force the Trump administration to come up with a
palatable tax reform that could deliver this year some of the stimulus
Wall Street has rallied on.
The S&P 500 rose as much as 12 percent since the surprise Nov. 8
election win President Donald Trump, mostly on bets that lower taxes,
deregulation and fiscal stimulus would boost economic growth and
As he acknowledged defeat for the healthcare bill, Trump said
Republicans would likely pivot to tax reform. Bets on that shift in
focus were seen in stocks late on Friday, as the market cut its day
losses when news of the health bill being pulled emerged.
"The market believes it raises the probability of a tax cut later this
year since Trump is showing more strategic behavior. (It) puts the
market a little more at ease," said Paul Zemsky, chief investment
officer of multi-asset strategies and solutions at Voya Investment
Management in New York.
On the campaign trail Trump promised to lower the corporate tax to 15
percent. In order to make the tax reform revenue-neutral, and agreeable
to the most money-sensitive wing of his party, his administration
counted on savings from the health bill that will no longer materialize.
"If we want to get something passed by the August break, itís going to
look a lot like tax reform light,Ē said Art Hogan, chief market
strategist at Wunderlich Securities in New York.
"If we settle somewhere between the 25-30 percent corporate tax rate,
that is far from the 15 percent offered in the campaign trail and the 20
percent currently in the House plan, (and) I think thatís where we end
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Traders work on the floor of the New York Stock Exchange (NYSE) in
New York, U.S., March 21, 2017. REUTERS/Lucas Jackson
Softer cuts in corporate taxes leave stocks vulnerable after a rally on hopes
for more, he said.
"Itís not a negative, itís just not the positive the market had priced in."
Aside from Trump's pro-growth agenda some investors have pointed to an improving
global economy and expectations for double-digit growth in corporate earnings as
support for the lofty valuations in stocks.
"The evidence suggests to me that there is some Trump fairy dust sprinkled on
this rally. That said, the underlying fundamentals do look better," said Alan
Gayle, director of asset allocation at RidgeWorth Investments in Atlanta,
A survey on Friday showed Germany's private sector grew at the fastest pace in
nearly six years in March, suggesting an acceleration in growth for Europe's
largest economy in the first quarter.
Stocks could also turn to earnings to justify their price. First quarter
earnings are expected to grow by more than 10 percent, according to Thomson
Reuters data. In another sign of investor bullishness, February's reading on
consumer confidence touched its highest level since July 2001.
If earnings fail to deliver double-digit growth, stocks could again be seen as
too expensive. At $18 per dollar of expected earnings over the next 12 months,
investors are paying near the most since 2004 for the S&P 500.
"The advance weíve had and the large spike in confidence, the expectations on
the economy and earnings expectations - we continue to believe it is too high,"
said Julian Emanuel, executive director of U.S. equity and derivatives strategy
at UBS Securities in New York.
(Additional reporting by Lewis Krauskopf; Editing by Cynthia Osterman)
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