Investing after the U.S.
tax overhaul

Jan 31, 2018

The new year brought a new U.S. tax code. The implications for the economy and asset prices are complex and are likely to play out over years. We aim to address some of the taxing questions here.

Highlights

  • The tax bill and potentially hefty government spending could boost global growth, push up U.S. inflation expectations, increase Treasury issuance and lead the Federal Reserve to increase rates at a slightly faster pace. This may shorten the lifespan of the current global expansion, but we’re not worried about the end just yet.
  • U.S. equities look well-positioned in the short to intermediate term as the outlook for a profitability boost eclipses longer-term growth fears. Highly taxed companies are seen as early winners (and those with lower tax losers) on paper, but the top line hides great detail below. The impact of the various tax provisions will vary across sectors, subsectors and businesses.
  • We see investment grade companies generally as winners in U.S. credit, but most of the windfall will likely go to shareholders rather than to paying down debt. We expect more bifurcation between higher- and lower-quality issuers in high yield, as companies with large debt loads face limits to interest expense deductibility. And U.S. investors still have one place to turn for tax shelter: municipal bonds.

Digging in

The various aspects of the tax package — and how they interact with and offset one another — will have differing implications across sectors, subsectors and individual companies. The details matter.

Overall, we expect U.S. company earnings and spending will receive an early boost. The Great Expectations chart below shows 2017 earnings estimates turned the corner after a string of disappointments, with 2015 and 2016 depicting the more typical pattern in post-crisis years. This year shows a clear sprint out of the gate. Our analysis finds earnings revisions are solid in Japan, Europe and EM as well, but the U.S. strength is unmatched. Understanding what comes next will require astute listening — particularly given that companies have up to a year to clarify and update their “provisional” estimates — and learning. Some questions our portfolio managers are asking:

  • How will your company finance growth derived from lower tax rates — through equity, debt or free cash generation?
  • To the extent M&A is part of your growth plan, what is your strategy to ensure the high prices being demanded today can translate to growth?
  • Will your company be subject to the extra taxes under the law’s new anti-base erosion rules? Can you estimate their impact?
  • Are you considering opening or relocating to U.S. sites based on the new provisions, particularly the added tax benefit to companies exporting U.S. goods and services to foreign customers?
  • To U.S. -based multinationals with effective tax rates below 13%: Will you be able to maintain your current tax rate given the law’s new minimum tax of roughly 13%? How?
Evolution of analyst earnings growth estimates, 2014-2018
Kate Moore
Chief Equity Strategist, BlackRock Investment Institute
Kate Moore, Managing Director, is Chief Equity Strategist for BlackRock and is a member of the BlackRock Investment Institute (BII). She is responsible for ...
Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, CFA, Managing Director, is BlackRock's Chief Fixed Income Strategist and a member of the BlackRock Investment Institute. His responsibilities ...