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Taxes will take centre stage for much of the fourth-quarter earnings season, which gets into full swing in the coming weeks. While the focus is on how the headlining cut in the domestic corporate rate will boost future results, the operating performance out of corporate America already looks quite strong. According to FactSet, earnings for companies in the S&P 500 are expected to rise 10.9% per share in the fourth quarter compared with a year ago, while revenues are seen increasing 6.8%.
Even more notable is that Wall Street analysts are predicting that all 11 sectors of the index will show growth. Looking at revenues, for example, this ranges from a 17.8% rise for energy firms to a more modest 2% uptick for telecom services. Should that prove true, it would be the first time in more than six years. Back in the third quarter of 2011, all sectors delivered top and bottom line growth. The index provider has since added real estate as a sector, but the same trend is evident.
What is driving this boom? Analysts generally agree it is synchronised economic growth around the world. Particular to the US, Credit Suisse equities strategist Patrick Palfrey argues that even as the economy has picked up, wage inflation has not, both propping up earnings and keeping interest rates low. This combination has helped stocks rally to consecutive fresh highs. And now stimulus is set to make an appearance through the government's tax reform.
He says it is unique to see a stimulative package coming out of the presidency this late in the economic cycle. In other words, the tax package will stimulate an economy that is already performing to applause. Following Mr Palfrey's plotline, the tax measures should modestly boost economic growth, increase demand for labour, and, in turn, bring inflationary pressure, all prompting the Federal Reserve to act more aggressively than expected to raise interest rates. Ironically, while tax measures may increase growth, the reforms could also send the curtain down on the current business cycle sooner than expected.
