How Could The U.S. Tax Bill Impact Markets In 2018?

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U.S. corporate earnings and GDP growth: On the upswing after tax bill clears Congress?

In Eitelman’s view, the passage of the bill was generally a positive development for financial markets, as it was delivered ahead of schedule and was a little more front-loaded with tax cuts than some investors were anticipating. “Markets had been focused on the potential for reductions in the corporate tax rate—and this bill delivered on that front,” Eitelman said, noting that the legislation slashes the corporate rate from 35% to 21%. He predicts that because of this, S&P 500® Index companies could see anywhere from 3 to 5 percentage points of earnings growth—translating into a modest tailwind for markets.

Eitelman and the team of Russell Investments strategists also believe that the new tax bill could boost U.S. gross domestic product (GDP) growth by about two-tenths of a percentage point. “Overall, this looks to be incrementally positive news for the nation’s economy,” he remarked—“at least in the short run.” However, Eitelman said, because the U.S. Federal Reserve (the Fed) is moving away from an accommodative monetary policy at the same time Congress is providing a fiscal stimulus, there’s likely to be a bit of a tug of war between the two institutions going forward. “The Fed could move to a restrictive policy stance by 2019—which could set us up for some turbulence and volatility in markets down the road,” he concluded.

Tax bill optimism—Already reflected markets?

Zooming in on U.S. equities in particular, Eitelman pointed out that much of the optimism around the new tax bill has already been priced in. “Since late October, when Congress started to move forward on tax reform, the U.S. has really started to outperform its global peers,” he said. All told, Eitelman believes that roughly two-thirds of the new bill has already been priced into markets. “There may be a little incremental tailwind to come, but not a significant chunk,” he stated.