President Trump’s tax cuts, which buoyed corporate earnings in 2018, could create some trouble for the markets in 2019.
S&P 500 (^GSPC) companies are on track to post 23% earnings growth in 2018, thanks in part to the corporate tax cuts. But earnings growth is expected to slow to 6% in 2019, according to Goldman Sachs analysts.
The Trump tax cuts are making the 2018-2019 comparables for earnings much less favorable than the ones from 2017-2018.
That could spook investors.
“It’s like if you go to a two-act play and the first act ends on an amazing high note and everybody applauds,” said Nick Colas, co-founder of DataTrek Research. “Then you go to intermission and wonder how the second act be any better than that. Sometimes you’re better off leaving at intermission.”
This scenario could be particularly pronounced for first quarter earnings in 2019, where Colas expects zero percent year-over-year earnings growth, given the blowout 25% year-over-year earnings growth seen for first quarter of 2018.
“Everybody understands this year’s 20+% earnings growth was driven by things that were not in the company’s control. Like tax cuts,” Colas said.
That may explain why this year’s 23% earnings growth didn’t quite translate into a blowout year for the overall stock market, with the S&P 500 up only 3.8% since the start of the year.
As for 2019’s stock market return, if Goldman Sachs’ 6% earnings growth estimate is right, Colas expects a 6% return for the S&P 500 – what he calls a solid single digit gain.
“But buckle up because it’ll be a lot more volatile next year and this earnings issue is why,” he said.
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