Why tax reform is still on track after the Senate upset

Thought of the day

The US Republican Party candidate Roy Moore has lost the US Senate race in Alabama. Doug Jones will be the first Democrat to win a Senate seat in Alabama in almost 25 years, and his victory reduces the Republicans’ Senate majority to a thin margin of 51-49 (from 52-48).

This could affect passage of future legislation, with CNN noting that the outcome of one in every 20 Senate votes this year would have been different had just one vote flipped to the opposite side. But the Republicans remain in control, and we do not think tax reform, in particular, will be derailed:

  • Jones won’t take his seat until 3 January 2018. The tax bill has already been approved by Congress and is now in the reconciliation stage. Senate and House negotiators are meeting today, and a deal is likely before the year-end break.
  • Jones’ victory may offer individual Republican Senate holdouts more leverage for their respective taxation priorities. With the prospect of a narrower majority next year, the incentive to reconcile and pass the bill has increased.
  • Even with a slimmer majority, the Vice President remains the tiebreaking vote. We expect VP Mike Pence to spend a lot more time in Washington next year.

So we remain positive on the prospects for tax reform. We look for 8% earnings per share growth, excluding the benefits of tax reform, while S&P 500 profit growth should reach 15% if tax reform benefits are included. We remain overweight global equities, of which US stocks are the largest proportion.

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