The framework is in place. All that’s left is to get the tax reform off the drawing board and into the books.  Despite skepticism in Washington D.C., the stock market believes the GOP will get something done even if it’s just tax cuts in the end.  There has been much debate about the “effective rate,” which is the tax rate companies actually pay. 

According to Morgan Stanley, the effective rate for the S&P 500 is 21.5%. Lumping all sectors and industries together is a mistake. Companies with the largest percentage of their business in the United States are going to be thrilled with a 20% rate or even a 25% rate.

According to S&P Global Markets, a top corporate rate of 25% would add $14.60 to the S&P 500 2018 earnings, bringing consensus to $160.60.  At 18 times earnings, it would mean the index hits 2,880; at twenty times 3,200 as the S&P 500 closed at 2,507 on Wednesday.

The biggest winners I pointed out on my show included rotation into small caps names in the Russell 2000. The index surged 2.0% yesterday on a massive spike in volume as many investors were chasing as I said they would.

Individual stock winners this week underscore the kind of impact lower taxes could have on shares of companies that are proxies for the U.S. economy.

 

American Tax Cut Winners	Industry	2016 Tax Rate
JB Hunt	Trucker	38%
Martin Marietta Materials	Construction	30%
Ulta Beauty	Retail	38%
PacWest Bancorp	Regional Bank	37%

 

Other Domestic Proxies

After the close, Thor Industries (THO) popped on stock earnings. There are signs that all age groups are enjoying the recreational vehicle experience.

Inside our monthly newsletter, Thor is an open position.  If often goes down initially on earnings, but the long-term potential is amazing. The industry has gotten smarter, and the American economy is on the move (pun intended).

Return of Blue Collar Workers

I featured Cintas (CTAS) in our monthly 2016 newsletter (September, November, and in our Special Election Report). The stock is up more than 35% since.

I love this - a proxy on blue collar jobs.  Shares surged on revenue gains of 23% (8.1% organic) as uniform rental business revenue increased 8.0% and first-aid business +9.2%.

Ask about our special offer for a free month to our monthly newsletter – email research@wstreet.com or call 1-800-286-1145.

Today’s Session

Equity futures have been under pressure all morning long even after the release of the third and final revision of second quarter GDP to 3.1% (initially reported at 2.6%).  Of course, this is really old news, and current quarter GDP estimates have come down a lot from initial consensus.   Hurricanes are having an impact, but the fact is, GDP models began slumping before hurricanes Harvey and Irma.

GDP Historic Comparisons

Highlights

• Personal Consumption Expenditures +3.3 best since 3Q 2013
• Goods: Durable +7.6% best since 1Q 1957
• Goods: Non-Durable +6.7% best since 4Q 1988
• Private Investment: Non-Residential +6.7% best since 2Q 1972
• Export: Goods +2.2% best since 3Q 2014
• Export: Service +6.2% best since 3Q 2011
• National Defense +4.7% best since 3Q 1998

Lowlights

• Private Investment: Residential -7.3% worst since 3Q 1959

It’s clear the nation needs to shore up residential investment to help this economy really take off.  I must say, we cannot assume super-growth is here because there have been numerous false alarms over the years, but the backdrop is completely different.  That backdrop gets even better with friendlier pro-growth tax rules. 

 

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