SocGen: "Every Bit Of Good News - Including Tax Reform - Is Now Priced In"

The global stock market is just a few days from entering the history books, largely thanks to the constantly priced in tax reform. As SocGen calculates, and barring any end of year sell-off, the MSCI World index is set to record it first ever year of posting a positive total return in every single month and will hit a remarkable sequence of 14 months of positive returns.

And, as we noted in our morning wrap note, spurring the US on has been the prospect of the much promised tax cuts, with US corporation tax set to be cut to 21% from its current headline rate of 35%. Mechanically this would imply a significant boost for US EPS numbers were it not for the fact that actual tax rates are significantly lower. Top-down numbers, compiled using actual tax revenue from the BEA national accounts, suggests that the effective paid tax rate is already at 21%, and this is similar to SocGen's own bottom-up calculations using cash tax paid from report and account cash flow statements. As SocGen's Andrew Lapthorne writes in a note this morning, "Yes, tax rates from the P&L are higher, but not much higher at 25%, implying a 4% boost to net income once the reforms are passed. So positive, yes, but not dramatically so."

Which brings us back to the constant pricing in of not only tax reform but every and any form of good news. This may be a problem, because as the French bank calculated one month ago, more than all of tax reform has already been priced in, to wit:

Since Trump’s election, the S&P 500 has risen 24%. Only half of this performance has been driven by earnings growth; the other half is from P/E expansion. Assuming that analysts have not factored tax reform into their earnings forecasts, tax reform expectations have been the driver of P/E expansion. The S&P 500 index tax rate is currently 26.6%. Assuming that US companies generate 43% of their profits abroad (here) and pay 35% of their US profits on taxes (i.e. with no loopholes for US profits), the average tax rate outside the US would be 15.5%. A decrease in the US tax from 35% to 20% as planned by Trump’s tax reform would thus theoretically boost earnings by 8.5%. The 12-month forward P/E has risen 12% over the last 12 months.

Fast forward to today with the Dow Jones more than 1,000 point higher, when SocGen again asks "so are these tax cuts priced in?" Here is the answer: 

We’d argue that every bit of good news looks priced in. Median US stock valuations have rarely been higher on both a forward PE and EV/EBITDA basis and valuation dispersion remains tight in all but a few sectors. To argue for a re-rating then seems ambitious. But there has nonetheless been a clear spike in outperformance in recent weeks in stocks with higher tax rates. And perhaps this is the real story – one of rotation. But where to? Value is not cheap and suffers from balance sheet risk. Growth stocks are clear losers as they pay relatively little in tax and will have bills to settle. Perhaps it’s our old favourite, defensive orientated Quality Income stocks (that have lagged during 2017) with their Telco, Oil & Gas and Utilities bias, that will prove to be the surprising winners in 2018...

Whatever the correct answer - assuming there is one - for now stock algos don't care and take every opportunity to buy the dip, and since there are no longer any dips, just buy...


Endgame Napoleon Juggernaut x2 Mon, 12/18/2017 - 08:34 Permalink

What growth? The Deplorables who elected Trump have not seen growth unless a few more part-time-temporary-churnmobile and 1099-gig jobs at $10 per hour count. Unless your major household bills are covered by a spouse, an ex spouse or by monthly welfare and child tax credits up to $6,444, those low-wage gigs do not count as job growth.

After we get a DACA amnesty, Deplorables will get exactly what they voted against: an increase in amnesty-inspired illegal immigrants on welfare for US-born kids, chasing those part-time jobs, staying below the earned-income limit for welfare [at least where traceable income is concerned], and enjoying free groceries, free rent, monthly cash assistance and a refundable EITC/CTC check from the US Treasury Department @ $6,444 for maximum sex and reproduction. That is how many citizen moms roll, too.

The growth in stocks does help the dual, high-earner couples who concentrate wealth via assortative mating, many of whom live in places that voted against Trump. They are the ones with the money to invest in stocks, and like their child-tax-credit-cashing counterparts who staff the mom-dominated jobs at the bottom, the extra tax-time cash and the libertine amount of time off for moms in their back-watchng mom-gang jobs will lead them to take their 15th excused babyvacation of the year, using their tax gains.

The low-wage employees who must cover all household bills on earned-only income, with no unearned income for womb productivity, will be getting around $24 per paycheck. We will not be able to accumulate much Bitcoin with that sum, especially with rent chewing up more than half of our pay.

In reply to by Juggernaut x2

vofreason Mon, 12/18/2017 - 07:54 Permalink

Is it the effective tax rate or market multiples that has you confused?  I know, I know ....if you've been brainwashed by Trump there must not be much rattling around up there besides childish anger and 3rd grade level stereotypes.  

Branded Mon, 12/18/2017 - 08:10 Permalink

SoGen?Why, ain't them the French fuckers that went insolvent in '08, then blamed a single 'rogue' trader for the $5 Billion in losses?

Hubbs Mon, 12/18/2017 - 08:06 Permalink

Every piece of good news may be priced in, but as long as the central banks are infusing fiat to allow companies to buy back their own shares and various other forms of financial rigging, the stock market will continue to climb.I think we have reached a point that the markets are so precariously high, that the central planners don't dare let the markets have even a 1% down day, as that may be sufficient to trigger the avalanche.

PaulDF Mon, 12/18/2017 - 08:17 Permalink

"How do you know I'm mad?" said Alice. "You must be," said the Cat, "or you wouldn't have come here.” “Why, sometimes I've believed as many as six impossible things before breakfast.” “Begin at the beginning," the King said, very gravely, "and go on till you come to the end: then stop.”

two hoots Mon, 12/18/2017 - 08:36 Permalink

"IF" With every announcement of some  company moving its HQ/production to the US, because of the tax advanage, the market  promoters will cheer and the buying will continue.  That will also suck in the foreign investors with it.   Is the US ahead of everyone else in a move (good business environment/tax advantage/scale) to build a system that will help repay its debts and keep it afloat?  musing"IF" the above happens do we enough workers, qualified workers, trained workers in the pipeline,  or is robotics also going to be a big push? more musing, more coffee"IF" wishes were horses, us beggars would ride.

Yellow_Snow Mon, 12/18/2017 - 08:38 Permalink

SocGen doesn't get it... the reason assets like the S&P and crypto's are rocketing up is because...        'Every Bit of BAD News is Priced In'  There is a mad dash out of fiat currencies worldwidePeople are losing faith in the Central Banking System !!!           HYPERINFLATION IS COMING !!!

nsurf9 Yellow_Snow Mon, 12/18/2017 - 10:46 Permalink

Yes, Yellow-Snow, they have pissed on our currency and us.What Obumer [sic], Triump [sic] and Maduro [sicker] knew; but, what not one of them or any of our other "elected thiefs" and the "mainstream" media would allow the sheeple to know. . . . . . . . . . . endless currency expansion (and outright stealing from our savings and all our work of all our yesterdays - without due process. 

In reply to by Yellow_Snow

Disgruntled Goat Mon, 12/18/2017 - 12:03 Permalink

Every bit of good news has been priced in for 10 fucking years ... so they had to institute reliance on non-gaap earnings, gross earnings multiples, fantasyland "forward" PE, government susidies, reductions in prudent loan loss reserves, stealth QE, secret loans, Interest on Excess Reserves, ZIRP, zero interest on consumer accounts, 30% credit card rates, unfunded pension plans, zero cost of money for big banks, excessive account fees and charges, stealth bailout of foreign banks by the Fed, massive unregulated derivative hedging without any consideration for counterparty risk, and the continuation of the IRA /401k fantasy that does nothing more than provide banks with a steady source of free collateral for 40 years of ones working life.Then you see politicians and bankers wonder about the rise of blockchain tech and crypto currencies .... they cant understand how and why ..... see "all of the above" assholes ...Fuck the banks and fuck the government

vladiki Mon, 12/18/2017 - 19:49 Permalink

Dangerous times. The egotist 'clever fools' who've been running things - with their religious faith in nonsense like Wealth Effect, Trickle Down, and the benefits of 2% inflation - have taken us to a bad place. They've not been kick-starting the economies. A false analogy. They've been treating the dysfunctional debt addicts with ...even more debt; trillions of it, and no let up. They think they can smoothly withdraw? Yes, if they've been kick starting, but no if they've been feeding the addict.

Such a pity these loonies have been joined by Trump, who's also a "cheap money guy". Much that's right with him, but he doesn't understand that what can work for an NY real estate developer (leave your creditors holding the bag if/when things go wrong) can't work for whole economies.

What a wonderful time to sell! Wish I'd waited. But what a terrible time to buy.