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Weekend Reading: Tax Reform Doing Exactly What We Expected

Authored by Lance Roberts via,

Shortly after the Tax Cut/Reform bill was passed by Congress, I did some analysis discussing the various myths of how those “tax cuts,” since they were primarily focused on corporations, would actually turn out.

Well, just two months into 2018, we already have some answers.

Myth 1:  Tax cuts will lead to a huge ramp up in earnings.

The problem with the idea that tax cuts will result in a huge increase in bottom-line earnings, is that estimates got way ahead of reality.

For example, in October of 2017, the estimates for REPORTED earnings for Q4, 2017 and Q1, 2018 were $116.50 and $119.76 respectively. As of February 15th, the numbers are $106.84 and $112.61 or a difference of -$9.66 and -7.15 respectively. 

First, while asset prices have surged to record highs, reported earnings estimates through Q3-2018 have already been ratcheted back to a level only slightly above where 2017 was expected to end in 2016. As shown by the red horizontal bars – estimates through Q3 are at the same level they were in January, 2017.  (Of course, “hope springs eternal that Q4 of this year will see one of the sharpest ramps in earnings in S&P history.) 

Wall Street ALWAYS over-estimates earnings and by about 33% on average. That overestimation provides a significant amount of headroom for Wall Street to be disappointed by year end, particularly once you factor in the “effective” tax rate that most companies actually pay.

But even if we give Wall Street the benefit of the doubt and assume their predictions will be correct for the first time in human history, stock prices have already priced in twice the rate of EPS growth.

It is quite likely that once again Wall Street is extrapolating the last few quarters of earnings growth ad infinitum and providing even more fodder for the market rally. It is also quite likely Wall Street will be proven wrong on earnings as so often has occurred in the past.

Myth 2: Corporations will use those tax cuts to hire employees and boost wages

As I discussed previously:

“The same is true for the myth that tax cuts lead to higher wages. Again, as with economic growth, there is no evidence that cutting taxes increases wage growth for average Americans. This is particularly the case currently as companies are sourcing every accounting gimmick, share repurchase or productivity increasing enhancement possible to increase profit growth.

Not surprisingly, our guess that corporations would utilize the benefits of “tax cuts” to boost bottom line earnings rather than increase wages has turned out to be true. As noted by Axios, in just the first two months of this year companies have already announced over $173 BILLION in stock buybacks.  This is “financial engineering gone mad” and something RIA analyst, Jesse Colombo, noted yesterday:

“How have U.S. corporations been deploying their new influx of capital? Unlike in prior cycles – when corporations favored long-term business investments and expansions – corporations have largely focused on juicing their stock prices via share buybacks, dividends, and mergers & acquisitions. While this pleases shareholders and boosts executive compensation, this short-term approach is detrimental to the long-term success of American corporations. The chart below shows the surge in share buybacks and dividends paid, which is a direct byproduct of the current artificially low interest rate environment. Even more alarming is the fact that share buybacks are expected to exceed $1 trillion this year, which would blow all prior records out of the water. The passing of President Donald Trump’s tax reform plan was the primary catalyst that encouraged corporations to dramatically ramp up their share buyback plans.”

SP500 Buybacks & Dividends By Year

“What is even more unwise about the current share buyback mania is the fact that it is occurring at extremely high valuations, which is tantamount to ‘throwing good money after bad.'”

Furthermore, there is scant evidence that wages are improving for the masses versus those in the executive “C-suite.” 

While well-designed tax reforms can certainly provide for better economic growth, those tax cuts must also be combined with responsible spending in Washington. That has yet to be the case as policy-makers continue to opt for “continuing resolutions” that grow expenditures by 8% per year and tack on another $2 Trillion in spending rather than doing the hard work of passing a budget.

Policymakers had the opportunity to pass true, pro-growth, tax reform and show they were serious about our nations fiscal future, they instead opted to continue enriching the top 1% at the expense of empowering the middle class. 

In the end, it is all working out exactly like we expected.

Here is your weekend reading list.

Economy & Fed


Research / Interesting Reads

“Based on my own personal experience – both as an investor in recent years and an expert witness in years past – rarely do more than three or four variables really count. Everything else is noise.” ― Martin Whitman


j0nx Stan522 Fri, 02/23/2018 - 17:06 Permalink

$1900 a year more in my wallet. Depends on how the end of the year returns go next January but the monthly checks are $160 more in my pocket starting this month. That's real money for Americans and will pay for vacations, electric bills, cars, etc . Dems are shitheals. The only hope they have of making this a wedge issue is if we all end up owing or getting less back at next year's tax return. I haven't even looked at the tax tables but with the child credit and the fact that the tables have reduced from what I've read then I should make out even better next year at tax return time than I did this year and that's with an extra $1900 annually in my pocket. Thanks President Trump!

In reply to by Stan522

Snaffew j0nx Fri, 02/23/2018 - 19:56 Permalink

sure, this is a super short term boost to Americans, but it is solely a result of an astounding amount of US debt.  The spending rampage has actually increased dramatically while at the same time reducing tax income for the government.  This is a double whammy and you likely won't be singing the same song in another 2 or 3 years.  It's not Trump's fault...he doesn't make the decisions---he is just a figurehead.  His massive array of advisors steer him in the direction they want and no matter what party is in office, they are all wasteful spenders that refuse to do their job. They opt for the easy way out--easy money and debt printed up and sold off in massive treasury auctions every month.  How can anyone look at the economic policies of America and think they are remotely sane, rational or constructive?  America's policies economically, militarily, domestic and globally are a fucking pathetic joke.

In reply to by j0nx

Dindu Nuffins Snaffew Fri, 02/23/2018 - 23:01 Permalink

Only trolls think $20 trillion gets paid off without a default eventually. It's beyond the point of fiscal restraint solving anything.

There is no reason to prevent the people from getting their own incomes because Uncle Sam just needs a few more bucks before he pays off all these unpayable loans. It's never going to happen, so stop pretending this junkie is about to get things sorted out with just a few more tax bucks.

In reply to by Snaffew

bunnyswanson Stan522 Fri, 02/23/2018 - 17:06 Permalink

When the dance is over, the decision of ~who~ pays the taxes is made during an election.  Poverty class and upper class get the breaks during republican wins and during democratic wins.  This is elimination of the middle class.  Where are those jobs?  I see a package of Kool-Aide has gone up for 10 cents per pack at Food-4-Less (where it had been 0.10 for years) to 25 cents per pack overnight.  We need our Kool-Aide, you see.  This is what worries me; the price of Kool-Aide.  Pendulum has stopped swinging due to the hijacking of the democratic party by elitists and their army of illegal voters and child rapists.

In reply to by Stan522

Nuclear Winter Fri, 02/23/2018 - 16:38 Permalink

Translated for the Libtards: The Dems have ZERO to offer and NO message to give to the American people to vote in both 2018 and 2020.

Hmmm, the 'Hope and Change' slogan looks more and more like 'Dope and Blame.'

alphawolf Fri, 02/23/2018 - 16:43 Permalink

Why is ZH so anti-tax cuts? Every article they print is about how bad tax cuts are. You know what? I don't give a fuck how bad they are for this or that. It's my money. "Fuck you, pay me".



JailBanksters Fri, 02/23/2018 - 16:50 Permalink

The same old same old. judging how well the country is doing by much profit the 1% are making.

If you take money out of the equation, the country is screwed.

The country is in perpetual wars, Blacks vs Whites, Jews vs Goyims, Have mores vs Have nots, God vs Satan.

More money sloshing around has not brought the country together or made a better country, it has divided the country and made the country worse.


JackTheOffer Fri, 02/23/2018 - 17:05 Permalink

Wages will increase, in response to tax cuts, only to the extent said tax cuts increase the demand for labor.   No tax cut is going to do that directly.

The price of labor is determined by the supply and demand for labor.   Shuffling around the tax cut deck chairs on the Titanic, or on the Good Ship Lollipop for that matter, ain't got squat to do with it.

Deport illegal aliens.   Build the wall.   End the H1b / H2 / H-shove it up your Paki ass visa program.  Etc.   Then you will see wages go up in the US.

Hikikomori Fri, 02/23/2018 - 17:42 Permalink

One thing the Democrats seem incapable of understanding - since the lower 49% of Americans pay no tax, because their income is low, the ONLY people ANY tax cut can help is the upper 51% of Americans.

Money_for_Nothing Sat, 02/24/2018 - 11:45 Permalink

He is looking at the wrong tax cuts. 140 million times 30 dollars a week equals 4.2 billion a week. Ten percent of that will go to state and local taxes. So 3 billion a week will be spent to buy stuff. Better stimulus than W or Obama. Local railroad traffic has picked up. And a person only gets a tax cut if they are on the books which helps Republicans in the coming elections.