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Devata Tseng

Corporate Earnings Lift US Stocks Ahead of Trump’s Tax Reform Plan

Last week the US President Trump stated on twitter that he will “unveil his major tax reform plan on Wednesday April 26”.

Trump intends to dramatically cut corporate tax from the current rate of 35% to 15%, and will likely also make tax cut or tax exemption on US corporate overseas earnings. In terms of personal income tax, the current 7 tax bands (minimum 10%, maximum 39.6%) will likely be simplified to 3 bands instead (12%,25%,33%).

After the failure of his healthcare bill proposal on March 24, markets have, to an extent, lost confidence in Trump’s leadership, resulting in USD plunging to a 4-and-a-half-month low with USD further weakening post Trump’s recent “strong dollar” statement on April 12. Therefore, his tax reform plan is crucial to demonstrate to the markets the capability of the Trump administration and to regain market confidence.

The tax reform bill will still need Congress’s approval to pass. If Trump is unable to get enough support again, it will likely lead to substantial market disappointment likely to initiate a USD and Equity sell off.

Q1 US corporate earnings have generally outperformed expectations. To date there have been more than 100 S&P 500 listed companies announcing their results with 77% reporting better-than-expected profits. Only 19.5% of these companies reported lower-than-expected profits mainly because of individual factors instead of market or macroeconomic factors.

The outperforming corporate earnings pushed US stocks up. Tuesday evening, the Dow Jones index hit a 6-week high of 21022, and the S & P 500 index hit a 8-week high of 2392.15.

A further 190 S&P 500 listed companies will report earnings this week including some major components such as: Microsoft, Amazon, Intel, and Alphabet. The mega-caps Apple and Facebook will report earnings next week.

Overall US corporate earnings growth for Q1 is forecasted to be 13.7% surpassing the 10% growth seen in Q4. If US corporate earnings continue to outperform, and Trump’s tax cut or tax reform bill proposal is passed by Congress, we can expect USD and the US stock market to move higher.

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