Tuesday, February 14, 2017

Trumps Tax Plan = Equity Market Spike

Trump's plan to decrease corporate taxes from 35% to 15% should lead to a very healthy spike in the market. The math is simple, but it's amazing how few people are talking about it.

Let's go through a simple example for XYZ Corp. Right now, here's what they look like:

Current price:            $100
Pre-tax earnings:         $10
After-tax earnings:     $6.50  (assumes 35% tax)
P/E ratio:                    15.4    (100/6.50)

Under Trump's plan, the new after -tax earnings number is...


Assuming the P/E ratio remains constant, the price of the stock must rise. Specifically...

8.50 x 15.4 = $130.77

That's almost a 31% rise, which is about what the market might rise over an average 3-4 years, except this should be more or less immediate. Capital will become cheaper to raise, and my specific hope is that it could revive the moribund IPO market.

Yes, some of this has been discounted since Trump was elected, but not much.

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