Wall Street hiking corporate profit forecasts on tax cut expectations

NEW YORK (Reuters) - Wall Street forecasters have been hiking their outlooks for 2018 corporate profits on rising expectations that the proposed U.S. tax overhaul, championed by President Donald Trump, will pass, giving a boost to companies’ bottom lines.

A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S. December 28, 2016. REUTERS/Andrew Kelly

Investors are looking for tax cuts to help sustain the rally in U.S. stocks. The separate bills in the House of Representatives and the Senate would cut the corporate tax rate to 20 percent from 35 percent.

Goldman Sachs strategists in a Nov. 21 note said the likelihood of a U.S. tax overhaul was the biggest contributor to its raised forecasts, noting that tax cuts should boost 2018 S&P 500 earnings per share by 5 percent.

It raised its 2018 earnings per share forecast for S&P 500 companies to $150 from $139, and said that without a tax overhaul, the estimate would be $143.

Ed Hyman, founder and chairman of investment firm Evercore ISI wrote in a Nov. 19 note to clients that “assuming a 20 percent corporate tax rate,” it is forecasting S&P 500 EPS of $150 for next year.

UBS strategists this week estimated that the S&P 500 could see an earnings boost of 6.5 percent if the corporate tax rate falls to 25 percent. It projects a 9.5 percent gain if the rate goes to 20 percent.

“The buy side has largely factored this in,” said Ian Winer, head of equities at Wedbush Securities, which does not put out its own S&P 500 earnings forecast.

“The reality is people don’t really know what this will be at the end of the day, but clearly people think this is a positive that is going to be good for stocks.”

The S&P 500 .SPX is up about 18 percent so far in 2017.

Other firms have yet to factor tax changes into their 2018 profit forecasts, among them Credit Suisse. Wall Street equities analysts, which base their forecasts on guidance from the individual S&P 500 companies, have yet to include the lower tax rate in their estimates.

But market watchers say firms providing their own estimates are making adjustments now and others are likely to follow.

“Analysts on the Street, they’ve been prudent by not providing the benefits to earnings from tax cuts for 2018. Now you’ll see earnings estimates rising,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

The latest forecast for S&P 500 EPS, based on aggregated company estimates for 2018, is $146.19, compared with an estimate of $146.01 from Sept. 1, according to Thomson Reuters’ data. That compares with a S&P 500 EPS estimate of $131.45 for 2017, the data showed.

Reporting by Caroline Valetkevitch; Editing by Leslie Adler