What’s unsettled US stocks?

After eight weeks of gains on the trot, US stocks dipped last week. What “stuck in the stockmarket’s craw”, says Justin Lahart in The Wall Street Journal, is that the tax cuts and reforms everyone had been counting on might not be as straightforward to implement as initially assumed. Senate Republicans unveiled their proposals to revamp the tax code late last week, and their plan foresees no cut in the  corporation tax rate (from 35% to 20%) until 2019, compared with a 2018 start under the lower house’s plans. “That means no bump in earnings until next year.”

Nor is it entirely clear whether the corporate tax cut will survive the horse-trading between the houses of Congress, continues Lahart. The Senate insists that any changes should cost no more than $1.5trn over ten years and mustn’t increase the budget deficit beyond that. But many members of the House of Representatives seem very keen to hold onto state and local income and property tax rebates. The upshot? The cut in corporation tax could end up smaller than we thought.

That may not have too much impact on stocks in the medium term, however. The earnings bump from lower taxes has been priced in, as we noted last week, but any disappointment should be tempered by bullishness over the macroeconomic backdrop. As The Economist’s Buttonwood columnist points out, almost half the respondents in the latest poll of global fund managers by Bank of America Merrill Lynch expect solid growth and low inflation, the highest proportion recorded in the history of the survey. Two-thirds think there will be some kind of tax reform next year, but they don’t expect it to have much effect on asset prices.

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