Tax Cuts Are Powering Good Outlook for 2nd Quarter, Asset Manager Says

Delta Investment Management shows how lower IRS tab pumps up profit margins.

Credit the corporate tax cuts taking effect this year for pumping up profit margins, which in turn is juicing earnings—and will continue to in this year’s second quarter.

That’s the analysis from Nicholas Atkeson and Andrew Houghton, the co-founders of San Francisco’s Delta Investment Management, noted for its analyses of economic and market data.

Congress passed the tax code overhaul reducing the corporate rate to 21% from 35%, beginning Jan. 1. That produced a big leap in first-quarter profits, year-over-year, to 26.8%. The consensus among analysts is for a 20% bump in earnings in the second period.

“From 2001 through 2017, average S&P 500 earnings growth was 6.9% with the breakdown being 0.2% from stock buybacks, 3% from revenue growth, and 3.8% from margin enhancement,” they wrote in a report to investors.

But in this year’s first period, margin contributed 16.6%, in part due to the Tax Cut and Jobs Act, they said. Another factor was revenue expansion, to 9.3%.

Some believe that the impact of the tax cut will be temporary, perhaps confined to this year.  But the Delta duo think the impact will not be confined to 2018, writing: “As long as the current tax law remains in effect, the profitability boost will remain in effect.” Of course, growth won’t keep on surging, but the base of profit growth will remain, they indicated.

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