31 replies to this topic

[NAV]

This is an old article. But gives you the S&P earnings estimates for 2017 based on various corp tax rates.

 

https://seekingalpha...-p-500-earnings

 

Based on this article, the S&P earnings estimate would be $151.70, if the corp tax rate reduces to 20% (assuming Trump's tax plan becomes a reality). At $151.70 earnings and today's price level of SPX 2570, the P/E would be about 16.9.

 

Without the tax cuts, the current P/E is at obscene levels, at around 25. If the tax plan is implemented, assuming 20% tax rate, the P/E would drop from 25 to 16.9.  That's a mountain of difference. All of sudden we drop from obscene valuation to normal valuations. 

 

The historic median P/E of S&P is around 15. So the fundmental guys will have little to complain about high valuations.

 

 

Post Tax plan here are some numbers

 

Now here's something to think about. Have you seen a major bull market top at fair valuations ? Nope. That means we are not going to top at a P/E of 17 but somewhere higher, much further away from the median.

 

At 16.9 P/E - S&P 2570 (Fair)

At 20 P/E - S&P  3034 (Overvalued)

At 25 P/E - S&P 3792 (Bubble territory)

 

I would wager that S&P will at least reach the overvalued territory, before this bull market ends.

 

Those who were buying post-elections were not stupid guys. They were the smart folks discounting all of this. While the dumb guys kept complaining about overvaluations all the way up. This will end like most other bull markets. The smart folks who bought at the bottom will distribute to the dumb folks who will capitulate at much higher levels.

 

Again this is all assuming the tax plan would get passed by both houses. Just some food for thought !

Edited by NAV, 22 October 2017 - 01:40 AM.

[csw2002]

You are assuming most large caps are paying full corporate tax rate. But are they? The average effective tax rate among S&P companies that had posted calendar fourth-quarter results as of Friday was 24.11 percent well below the current corporate rate of 35 percent according to data compiled by The Earnings Scout, a corporate earnings analysis firm.

Edited by csw2002, 22 October 2017 - 03:54 AM.

[redfoliage2]

There are different versions of Spx ratings estimate. According to Goldman Sachs Spx earnings for this year is 116, not 137, for next year is 122.
In the article it assumes that SPX companies are paying 35% tax which is not true. Also, it assumes the tax will be cut to 15%, that is obvious not true. So, that article is for a misleading purpose.

Edited by redfoliage2, 22 October 2017 - 06:09 AM.

[csw2002]

There are different versions of Spx ratings estimate. According to Goldman Sachs Spx earnings for this year is 116, not 137, for next year is 122.

Regardless of the number, far less tax benefit would accrue to SPX Earnings than the 35% to 20% tax cuts headline number would suggest. What is more, Price Earning multiples have not been a good predictor for forward returns of the general market. There are far better valuation metrics that strongly correlate with subsequent 12 year returns.

[NAV]

You are assuming most large caps are paying full corporate tax rate. But are they? The average effective tax rate among S&P companies that had posted calendar fourth-quarter results as of Friday was 24.11 percent well below the current corporate rate of 35 percent according to data compiled by The Earnings Scout, a corporate earnings analysis firm.

 

Does not matter what the effective rate is. Bottomline, a 10% cut will add $13.1 to the S&P EPS estimate.

 

It's like debating marginal rate vs average rate paid. 

[NAV]

 

You are assuming most large caps are paying full corporate tax rate. But are they? The average effective tax rate among S&P companies that had posted calendar fourth-quarter results as of Friday was 24.11 percent well below the current corporate rate of 35 percent according to data compiled by The Earnings Scout, a corporate earnings analysis firm.

 

Does not matter what the effective rate is. Bottomline, a 10% cut will add $13.1 to the S&P EPS estimate.

 

It's like debating marginal rate vs average rate paid. 

 

 

 

Michael Thompson, president and chairman of Standard & Poor's Investment Advisory Services, and his team ran some numbers to evaluate the potential impact of Trump's tax cut proposal on S&P 500's earnings. Keep in mind the current estimate for 2017 S&P 500 EPS is about $132 per share. His assessment shows that for every 1% decrease in the corporate tax rate.

 

 

S&P 500 2017 EPS (at various corporate tax rates)

15.0% $158.2

17.5% $154.9 

20.0%  $151.7

22.5%  $148.4

25.0%  $145.1

27.5%  $141.8

30.0%  $138.6

32.5%  $135.3

35.0%  $132.0

 

 

 

S&P Advisory services have done their homework. If you disagree with them, then do your own work and show us why they are wrong.

Edited by NAV, 22 October 2017 - 06:23 AM.

[NAV]

There are different versions of Spx ratings estimate. According to Goldman Sachs Spx earnings for this year is 116, not 137, for next year is 122.
In the article it assumes that SPX companies are paying 35% tax which is not true. Also, it assumes the tax will be cut to 15%, that is obvious not true. So, that article is for a misleading purpose.

 

Look you can use any baseline number that you want. We can all sit and argue all we want. But the bottomline is it is going to add xx.x amount to the S&P earnings, based on how much cut we get. And the the current P/E will get a corresponding donwward adjustment. I have shown the estmates based on the consensus numbers and the possible tax cut (20% is what is being debated right now) 

 

I am not a fundamental guy and don't trade on it. But for those who have been crying overvaluation it will be a rude awakening when the donward adjustment of P/E happens. 

[redfoliage2]

 

You are assuming most large caps are paying full corporate tax rate. But are they? The average effective tax rate among S&P companies that had posted calendar fourth-quarter results as of Friday was 24.11 percent well below the current corporate rate of 35 percent according to data compiled by The Earnings Scout, a corporate earnings analysis firm.

 

Does not matter what the effective rate is. Bottomline, a 10% cut will add $13.1 to the S&P EPS estimate.

 

It's like debating marginal rate vs average rate paid. 

 

Regardless the earnings estimate is true or false I doubt all the tax cut benefit will go into earnings.  More importantly, in anticipating/repeated hypes of the tax cut SPX price has risen 20% year to date, the 10% tax cut has been more than priced in.  To support this 20% price rise it would need at least 15% tax cut assuming all tax cut benefit goes into earnings..

Edited by redfoliage2, 22 October 2017 - 06:32 AM.

[csw2002]

 

 

You are assuming most large caps are paying full corporate tax rate. But are they? The average effective tax rate among S&P companies that had posted calendar fourth-quarter results as of Friday was 24.11 percent well below the current corporate rate of 35 percent according to data compiled by The Earnings Scout, a corporate earnings analysis firm.

 

Does not matter what the effective rate is. Bottomline, a 10% cut will add $13.1 to the S&P EPS estimate.

 

It's like debating marginal rate vs average rate paid. 

 

 

 

Michael Thompson, president and chairman of Standard & Poor's Investment Advisory Services, and his team ran some numbers to evaluate the potential impact of Trump's tax cut proposal on S&P 500's earnings. Keep in mind the current estimate for 2017 S&P 500 EPS is about $132 per share. His assessment shows that for every 1% decrease in the corporate tax rate.

 

 

S&P 500 2017 EPS (at various corporate tax rates)

15.0% $158.2

17.5% $154.9 

20.0%  $151.7

22.5%  $148.4

25.0%  $145.1

27.5%  $141.8

30.0%  $138.6

32.5%  $135.3

35.0%  $132.0

 

 

 

S&P Advisory services have done their homework. If you disagree with them, then do your own work and show us why they are wrong.

 

Please, you didn't even read the article you linked. Let me quote it for you

 

>>

 

President-elect Trump's proposed nominee for U.S. Treasury secretary, Steve Mnunchin, said on our air yesterday that the administration was still targeting a reduction in the corporate tax rate from 35 percent to 15 percent.<<

>>Here's the problem, and why Thompson wisely referred to his calculations as "hypothetical":

1) It's unlikely that all the tax savings will go straight to the bottom line. The money can be used for other purposes. The obvious alternative choice is capital expenditures — investing in equipment. The money could also be used for mergers and acquisitions. Or buybacks.

2) The tax code is very complicated. Most corporations don't pay 35 percent. Thompson notes the effective tax rate is closer to 29 percent. Some pay far less. Some have very aggressive tax efficiency (or tax avoidance) strategies. So if the effective rate goes to 15 percent, will those who pay far less pay even less? Will we have some companies end up paying, say, 3 percent?<<

 

[NAV]

csw,

 

Every financial projection is "hypothetical" until it happens. Otherwise it would be called facts. Yes the S&P earnings estimates are "hypothetical" until it happens. The tax benefit is also a rough estimate. You guys are missing the point. No matter what basline number you choose to use, there is going to be a adiition to the earnings estimate. If you don't beleive that, then we are wasting time debating on that. 

 

And i did not say P/E estimates are a good indicator of future S&P price. I merely pointed out what the S&P price would look like, when the P/E reaches overbought territory. The market can choose to stall here and collapse - nobody knows. That's crystal balling. But then just look at some of the major bull market tops and see what P/E values were acheived before the collapse started.

Edited by NAV, 22 October 2017 - 06:48 AM.