Mnuchin: US stocks to face ‘significant’ fall without tax reforms
The US Treasury secretary has warned that American equities will reverse a “significant amount” of their recent gains if Congress does not enact reforms.
Steven Mnuchin said in a Politico podcast that there is “no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done”. He added that the spectre of regulatory relief has also been priced into stocks.
He reckons equities will “go up higher” if the tax plans, which include a reduction in the statutory corporate tax rate, are passed.
Mr Mnuchin’s comments were an allusion to the sharp rise in equities prices since Donald Trump won the presidential election in November 2016. The benchmark S&P 500 index has rallied by almost a fifth since Mr Trump’s shock victory, according to FactSet data.
Mr Trump has not shied away from taking credit for the rally, tweeting on Monday that “The US has gained more than 5.2 trillion dollars in stock market value since election day!” He also tweeted “wow!”, along with an animation of the Dow’s gains over the period on Tuesday.
Wall Street investors generally agree that the idea of tax reform has been bullish for equities since lower taxes should boost corporate profits. Goldman Sachs, for instance, reckons the White House tax proposal would lift 2018 S&P 500 earnings per share growth 12 per cent above its baseline forecast that does not include the tax adjustments.
But other factors have also been cited for the S&P 500′s gains, including two straight quarters of double-digit earnings growth, a strong labour market, robust domestic and international demand, and the effect of several years of stimulative monetary policy.
Investors are not convinced that reform is needed for further market gains. Bank of America Merrill Lynch’s latest survey of fund managers shows that 68 per cent expects the US to see tax cuts in 2018, “but tax reform will not have a big impact on risk assets”.
For his part, Mr Mnuchin remains confident that tax reform will be passed by lawmakers, saying that he gives his “absolute guarantee” that a package will be in place by the end of this year.