Thought of the day
23.08 - Common ground emerging?
Expectations that the Trump administration will be able to push a fiscal stimulus package through Congress have almost completely eroded. US small caps, which are domestically focused and have more to gain from tax reform, have given up all their post-election outperformance relative to large caps. Consensus forecasts for US GDP growth are also relatively flat – 2.1% for this year, 2.3% for next and 2.1% for 2019 – suggesting low expectations among market participants for a boost to growth from fiscal stimulus.
While we agree that the probability of a fiscal stimulus package being passed has fallen, expectations, in our view, may now be too low, and any signs of progress are likely to support the USD and US equities:
- Markets rallied on 22 August amid reports of progress on the tax reform proposal. The so-called "Big 6" – comprising Republican leaders from each congressional chamber, National Economic Council Director Gary Cohn and Treasury Secretary Steven Mnuchin – have reportedly found common ground on the best ways to pay for individual and corporate tax cuts.
- The UBS US Office of Public Policy estimates a 55% chance that tax relief will go through. Comprehensive tax reform could boost S&P 500 earnings per share (EPS) by 8–9%, and a repatriation tax holiday could provide a further 3–4% EPS boost.
So we believe that the USD and US equities will still find support on reports of progress on tax reform negotiations. We recently closed our overweight euro position versus the USD, and we remain overweight global equities.