Banking on tax reform.
Photographer: Andrew Burton/Getty Images
Most equity investors I talk to put little hope in the passage of any corporate tax reform in the U.S. Congress this year. Moreover, their confidence that anything will pass in 2018 is dimming. They see more immediate issues, from debt-ceiling and budget debates to providing disaster relief for Texas and almost certainly Florida, as pulling Washington’s attention away from the longer-term necessity of revising the nation’s tax code.
At the moment, market participants don’t seem to care. Corporate profit growth remains strong, long-term interest rates linger near all-time lows, and global economic growth now appears to be synchronized to the upside. Yes, equity valuations feel stretched, but when earnings are high and rates are low, that is hardly a surprising outcome.
Step back, however, and you’ll see some worrisome trends. We are closer to a cyclical peak than a trough for earnings. Moreover, central banks in the U.S. and Europe are plotting their removal of financial-crisis-era stimulus, which should push long rates higher over time. The investment climate for domestic equities is fine today, and probably tomorrow, but it would be foolish to assume it mirrors the old joke about a Los Angeles weatherperson’s forecast: “Sunny and 75 degrees, next forecast in five days …”