BoAML: Likely Watershed Tax Reform Will Have Winners As Well As Losers

Many expect 2017 to be a watershed year for tax reform. Such expectations have arisen from President Donald Trump’s expressed enthusiasm for it, not to mention the high priority he places on tax legislation. However, even before Trump’s proposals emerge, House Speaker Paul Ryan’s Blueprint has provided a broad indication of what investors could expect.

The impact of corporate tax reform on the S&P 500

Bank of America Merrill Lynch analysts evaluated the impact of Blueprint proposals and quantified the impact of corporate tax reform on the S&P 500, with some scenario analysis to account for potential differences in the final bill, depending on Trump’s proposals.

Overall, Merrill estimates the Blueprint proposal would initially boost S&P 500 earnings per share by $5-6, assuming the proposed end of interest expense deductions would apply to new debt, or will be grandfathered. But the long-term impact would vary, depending on multiple factors, and specific industries and individual companies would be affected differently. Still, the bank’s previous estimate of $137 for 2018 S&P 500 EPS implies healthy two-year growth of 16%.

But the devil is in the details, the bank’s analysts acknowledged in its Equity Strategy Focus Point newsletter Jan. 29.

“Over time, the loss of the interest tax shield would be a significant drag on earnings as existing debt is refinanced. Additionally, the corporate tax rate is critical in determining whether or not the tax reform policies end up being accretive to earnings on a sustained basis,” the analysts pointed out.