The December jobs report left much to be desired. But, who cares as the outlook for stocks remains bright.
Here is why the bulls have reason to ignore the jobs numbers.
Tax Reform, People
The impact of tax reform to corporate profits is likely to be huge in 2018.
Bank of America Merrill Lynch estimates that the corporate tax overhaul could boost earnings for U.S. companies by 10% this year. The impact has sent Wall Street analysts clamoring to upwardly revise their earnings forecasts, which often provides a jolt to stock prices. Bank of America notes that analyst earnings revisions are now hovering around new highs.
Besides corporate tax reform, and a factor Wall Street may be under-estimating, is the jolt to earnings from the tax break on cash held overseas. The new law offers companies a tax break -- paying between 8% and 15.5% as opposed to the normal 35% -- to bring cash held overseas back to the U.S. With that cash, companies could buyback stock to jack up their earnings.
The biggest beneficiaries of a repatriation tax would be tech companies, according to an October note from Goldman Sachs according to an October note from Goldman Sachs. About 11 of the 20 S&P stocks with the highest overseas cash as a percent of market cap are in the IT sector. In fact, tech accounts for 70% of total S&P 500 taxable cash stashed abroad, including nearly a quarter from Apple (AAPL) alone.
Beyond Apple, Goldman also identifies Cisco Systems Inc. (CSCO) , NetApp Inc. (NTAP) , Qualcomm Inc. (QCOM) , Oracle Corp. (ORCL) , Microsoft Corp. (MSFT) , Western Digital (WDC) , Citrix Systems Inc. (CTXS) , Juniper Networks (JNPR) and VeriSign Inc. (VRSN) as tech companies that stand to benefit most from a reduced repatriation tax.
Non-tech companies that would reap the most benefits are Amgen Inc. (AMGN) , Ralph Lauren Corp. (RL) , Waters Corp. (WAT) , Foot Locker Inc. (FL) , General Electric (GE) , Abbott Laboratories (ABT) , Priceline Group (PCLN) , Johnson & Johnson (JNJ) and Merck & Co. Inc. (MRK) .
There is nothing more bullish for stocks than if the entire world believes valuations could be driven higher. That's likely to be the case in 2018 as companies benefit from U.S tax reform.
Bank of America Merrill Lynch estimates that with U.S. growth forecasts destined to be pushed up, global growth could top 4% this year. Impressive to say the very least.
A great environment for profit margins: more volume coming in and input cost inflation staying tame.
The economists at Bank of America Merrill Lynch believe that inflation will pick up in 2018 off a low 2017 base. But, inflation is unlikely to intensify to the point margins are crushed and the Fed is hiking rates 50 basis points at each policy meeting.
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