But overall earnings are still increasing and will likely stay on that path into 2018.
The economy is continuing to grow, and earnings estimates are still growing. Citigroup’s chief U.S. equity strategist, Tobias Levkovich, is among many strategists who are optimistic on economic growth and believe we are not at peak earnings.
“Corporate funding costs, hiring intentions, capital spending intentions all indicate economic growth,” he told me.
This year, analysts expect the S&P 500 to earn roughly $131 per share, a 10 percent increase from 2016. For 2018, earnings are expected to grow a 7 percent, to $140.
Also, tax cut prospects are again juicing the market. President Donald Trump is proposing cutting the corporate tax rate to 20 percent from 35 percent. But the effective tax rate — what corporations really pay — is about 27 percent for the S&P 500 companies, Levkovich tells me. He reckons each 1 percent cut in corporate tax generates roughly $2 in earnings per share.
Let’s assume that the effective corporate rate goes down 4 percentage points to 23 percent — that would add $8 to earnings, bumping up 2018 estimates to $148 from $140.
That’s a big boost — that’s 6 percent more on top of the 7 percent increase that is expected without tax cuts.
That’s why the market keeps holding up. The combination of expected improvement in the economy and the tax cuts indicates that we are not yet at an earnings peak.
It’s no wonder the markets are so obsessed with tax cuts.