This current bull in stocks has run for nearly nine years, having left the gate in March 2009. If we can stride past March 2018 without a 20% market correction, the bull will enter its 10th year on the run.
Will the bull-market run extend into a 10th year?
I’d be hard-pressed to bet otherwise. With little more than a week into 2018 trading, the three major markets barometers — the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite — have already posted impressive gains.
The Dow industrials are up 3% for the nascent year. The S&P 500, dominated by large-cap technology, is also up 3%. The NASDAQ Composite index, also dominated by large-cap technology, has gained 4% year to date.
The Dow features old-school stocks like Boeing (NYSE: BA), McDonald’s (NYSE: MCD), and Caterpillar (NYSE: CAT). These stocks have gained favor among investors in 2017. They continue to gain favor in 2018.
Old-school Boeing blew past most new-school stocks last year. Boeing shares finished the year up 90%. Boeing shares are up another 10.5% over the first 10 days of January.
But the rise of the old school need not correlate with the fall of the new school — the stocks that dominate the S&P 500 and NASDAQ Composite indices. New-school stocks continue to retain their popularity.
Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), Amazon.com (NASDAQ: AMZN) et al. trend higher, as they have done for the past five years. All four finished 2017 with double-digit gains. All four have posted single-digit gains in 2018.
Tax Reform and Bull Market’s 10th Year
Tax reform will prove to be a powerful propellant to maintain stocks on an upward trajectory. The new tax law ensures corporations will retain more money after taxes. Two provisions of the new law are most impacting for our consideration.
First, the top corporate income tax rate has been lowered to 21% from 35%. Less tax finagling and fewer tax-driven machinations will be required to ensure a lower tax bill going forward. More corporations will be driven by purely economic motives to drive earnings higher.
Goldman Sachs (NYSE: GS) has crunched the numbers based on a 25% top corporate income tax rate. Goldman Sachs’ calculations show S&P 500 earnings growing 15% next year compared with the 7% forecast under present tax law.
The second provision centers on foreign earnings. The new tax law opens the door for corporations to repatriate billions, if not trillions, of dollars. The dollars are stored in foreign accounts to avoid paying the formerly high corporate-income-tax rates in the United States.
Repatriate or not, corporations no longer have a choice. The new law requires them to pay a mandatory repatriation tax rate of 15.5% on cash and liquid assets and 8% on illiquid assets.
The White House estimates that U.S. businesses hold more than $2.5 trillion in assets in foreign accounts. Apple, Microsoft, Cisco Systems, and Oracle (NASDAQ: ORCL) are four of the largest holders. These four companies hold nearly $500 billion of liquid assets outside of U.S. borders.
The Financial Times calculates the changes could save Apple, the company with the largest foreign cash account, more than $47 billion in tax liability on repatriated cash.
Apple estimates that its tax liability on foreign earnings would be $78.6 billion under the old tax regime. The Financial Times calculates that Apple’s tax liability would be roughly $31.4 billion on foreign profits under the new tax regime.
Other companies will benefit from income-tax reform as well.
Tax reform — marked by lower corporate income tax rates — is a catalyst for additional rotation into value stocks in the bull market’s 10th year. Value stocks are backed by companies that generate approximately 80% of their revenue in the United States and were subject to the full force of a 35% top corporate income tax rate.
So long as corporate earnings rise, interest rates (long-term) hold at multi-year lows, volatility remains subdued, and every market dip is met with more buying, the bull market’s 10th year is not only doable, it’s probable.