Chart of the Week: Trump’s Tax Plan Gets a Little Help From Some Friends

The so-called ‘Trump trade’ may have shown a flicker of life following the passing of a 2018 budget blueprint last Thursday, but we do not expect US tax reform to be enacted until Q1 or Q2 next year.

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Last Thursday, Republican senators passed a 2018 budget blueprint by a narrow 51 – 49 margin, with Democrats unanimously opposed. Thursday’s vote is one significant hurdle cleared for the administration’s recent tax proposal; the US dollar, Treasury yields and the probabilities that investors assign to future interest rate increases rose in response. But overhauling the tax code and cutting taxes significantly, as planned by the president, is a very complex process and it will be no easy task for the administration to please all sides and get enough support for the final tax bill to be passed. As we explained in a recent note, we believe that large corporate tax cuts will eventually be enacted, but this is more likely to happen in Q1 or Q2 next year, and not later this year, as the administration hopes – Thursday’s developments do not change that view. The upshot is that we expect the so-called ‘Trump trade’ to come back to life as tax reform progresses, although it may be a bumpy ride as delays occur and divisions between Republicans are made public. The bigger picture though, as we discuss in our latest Global Economic and Markets Outlook, is that the effective rate of corporation tax would have to turn negative in order to render current US equity valuations sustainable over the medium to long term.

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