Strip out Trump tax cut and S&P 500 profits are still surging
President Trump’s corporate tax overhaul is the gift that keeps on giving as companies close out a second straight quarter with earnings growth above 20 percent. But make no mistake, even without the juice the profit picture would look better than it has in years.
“Tax is benefiting, but even if you take the tax benefit away, pretax profits were accelerating,” Dan Suzuki, a portfolio strategist at Richard Bernstein Advisors, said on Bloomberg Television Monday.
Credit Suisse estimates that the lower levies are adding nearly 8 percent to EPS. With trend EPS growth on pace for 25.5 percent in the second quarter, stripping out the tax boost still leaves a 17.6 percent increase, the firm’s chief U.S. equity strategist wrote earlier this month. That’s still the highest since 2011, which obviously predates the overhaul.
The S&P 500 was flat as of 11:36 a.m. in New York Tuesday, after briefly crossing the 2,900 threshold for the first time. With earnings season coming to a close and trade negotiations moving forward between the U.S. and Mexico, investors are pushing stocks to all-time highs. The Russell 2000 and Nasdaq also closed at record highs Monday, and the Dow breached 26,000 for the first time since February.
As for what these new highs mean for how much fuel the market has left, Suzuki says it’s more about signals such as profits, liquidity and sentiment, which are all supportive.
“You can make some sort of estimate of what that peak is going to be, but the reality is, why forecast the forecasting tools?” he said. “We’re really going to be looking out for the signals that tell us the bear market is here.”