Having passed the Senate, and - moments ago, for the second time - the House, the Republican Tax Cuts and Jobs Act, aka the Trump Tax Cuts is officially a done deal, just waiting for the President's signature, at which point the longest "rumor" of 2017 will become the news. But does that mean that after "pricing it in" in some part virtually every day of the past year, the market can now sell the news? Or, as exasperated traders would put it, "is it finally fully priced in?"
Indeed, analysts, economics and investors are starting to look beyond the soon-to-be-completed tax overhaul, and judging by today's reaction, the answer may well be yes as stocks, including tax-sensitive banks, are little-changed amid expectations tax cuts may not boost growth that much, and as likely benefits may already be priced-in to stock prices.
In fact, as Bloomberg adds, the S&P 500 and KBW bank indexes are both little changed, with top bank gainer PNC paring gains of as much as 1.1%; other rising banks include Huntington, Wells Fargo, Northern Trust, and BofA
So with the market seemingly content with tax reform as the biggest driver of market upside in 2017, here is what the banks think, courtesy of Bloomberg.
BOFAML (Erika Najarian)
- For U.S. banks, tax overhaul is largely priced in
- Even so, sees regulatory reform adding 200bps-250bps to ROEs, which may support greater upside
MORGAN STANLEY (Michael Zezas)
- Sees "modest near-term positive" for markets, but not a fundamental change in trajectory
- For equities, lower-than- expected tax rate modestly helps earnings/prices near-term, but further rally would be considered low-quality, carry greater volatility risks
- Still sees flatter rates curves given decelerating growth, rising recession probabilities in 2019; for credit, tax overhaul isn’t bullish catalyst for spreads, may exacerbate medium-term cycle risks
- Sees moderate boost to near- term economic growth; est. 2018 GDP growth of 2.4% 4Q/4Q (with 0.3pp total tax effect); doesn’t see "panacea for the economic cycle," as tradeoff for lower-than-est. corporate rate (21% vs est. 25%) appears to be more mixed personal benefits, modified corporate incentives
- Flags corporate behavior as a "critical uncertainty"; growth may strengthen if cos. spend more returned dollars than Morgan Stanley assumes
JEFFERIES (Sean Darby)
- With legislation set to come into force in 2018, equity investors will likely see lower multiples, faster earnings growth through to 2019
- Flags upside risks to forecasts: Delayed investment spending can now be revived alongside benefits of accelerated expensing; cos. can immediately increase dividends, raise buybacks; foreign investment into U.S. may rise; cos. likely incentivized to spend rather than save as U.S. real interest rates are close to zero, negative if based on PPI
- Domestic small-cap cos. may benefit most; banks will benefit from higher short-term rates, lower taxes; tech may profit from higher overall corporate investment spending, high unrepatriated earnings; telecoms have high effective tax rate, but pricing environment is lackluster; consumer discretionary "natural winner" given high tax rate, while also benefiting from better global growth; health care would be disadvantaged by tax inversion status, already low effective tax rates; little to offer for utilities, to some extent real estate, while rising long rates would be disadvantageous to both
COWEN (Chris Krueger)
- Bill is much more than just a tax cut bill, as it includes nearly every major Republican domestic economic policy priority from the past decade, along with seeds to unwind ObamaCare
- Cites: Chained CPI, drilling in ANWR, and "enough unintended consequences and drafting errors likely to keep the Swamp busy for another 31 years"
- BARCLAYS (Michael Cohen)
- Passing tax bill supports U.S. economic growth in the short term, but is bearish long-term development for oil and gas markets
- Bill’s policies are likely to reduce demand for gas and oil, raise supplies in medium, long term
- Notes Barclays economists expect "small bump" to U.S. GDP from tax overhaul, equities analysts have suggested 15pps change in corporate tax rate may add $1b to net income for U.S. E&P industry, equivalent to $1 increase in oil prices
BLOOMBERG INTELLIGENCE (Andrew Silverman, Drew Reading)
- Mixed bag for U.S. solar, wind energy
- Not positive for housing, but impact likely minimal