The promise of tax reform propelled the U.S. stock market higher in the months after the November election, and strong corporate profits have continued to lift it to dizzying heights.
Strong second-quarter company earnings have pushed the Dow Jones industrial average into record territory above 22,000 and the broader S&P 500 up 10.6 percent for the year. A tweet by President Donald Trump last week appeared to claim some credit for the gains, though many analysts and economists point to growth in China and Europe lifting markets, as well as stimulus programs by central banks.
Trump wants to roll back taxes for corporations and individuals, simplify the tax code and spur growth through investment. His plan also envisions 3 percent economic growth — which would be higher than the 1.9 percent growth in the economy through the first half of this year.
Tax reform is crucial to get to that 3 percent number, as House Speaker Paul Ryan told CNBC in June. “Tax reform’s absolutely essential for getting faster economic growth that’s durable, long-lasting,” he said.
The economy added 209,000 jobs in July, according to the monthly report on Friday. Gross domestic product rose at an annualized 2.6 percent rate in the second quarter. Unemployment of 4.3 percent has not been lower in 16 years. The Federal Reserve is raising rates cautiously and probably won’t hike them again until the end of the year.
Goldman Sachs economists say unemployment could dip to 3.8 percent, which could put the Fed on track to raise rates once a quarter starting next year even if inflation remains below its 2 percent target.
Stimulus from a tax cut could spark inflation, forcing the Fed to raise rates higher than it might have to keep ahead of the curve. Paul Ashworth, chief U.S. economist at Capital Economics, said it could end up in the situation where the U.S. gets “a deficit-financed tax cut that is dressed up as supply side, and given a fig leaf that it will be funded by economic growth.”