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By Jeremy Schwartz, Director of Research, WisdomTree Investments and
Corporate tax cuts were a focal point of Donald Trump’s campaign — and Trump says lowering corporate taxes will be a priority in his first 100 days as president.
Based on the initial market response to Trump’s victory, lowering tax rates looks to us like the most important factor driving the market.
Equity markets, of course, like it when taxes are cut. It naturally means more after-tax earnings that can be reinvested or distributed to shareholders — and, importantly, an improvement in valuation ratios that many think look extended under present circumstances.
We published an initial sensitivity analysis to look at how various assumptions on tax rates might impact the earnings growth and ultimate market valuations across a market cap-weighted index set of the S&P 500, S&P 400 and S&P 600 — and across the sectors in those indexes. We have updated our original analysis to also include domestic WisdomTree Indexes; we also have updated our initial model for estimating the potential tax benefit that shows new results for the cap-weighted index family.1
Lower Tax Rates = Big Earnings Growth and Market Moves in Small Caps
To summarize the results, a simple model shows the following: the more earnings (and taxes paid) that come from the U.S., the greater the earnings growth would be from a tax cut, because by and large, the companies with revenue across the world already have lower effective tax rates. Continue Reading…
