The selection of Scott Bessent as Treasury secretary is extremely positive for markets. Bessent has a deep understanding of markets and economics, and, importantly, understands the long-term benefits of taxing consumption through tariffs with proceeds from the tariffs used to fund cuts in taxes on investment. He is also a fiscal hawk who is likely to support spending restraint which increases national savings and investment. We estimate that Federal fiscal irresponsibility reduces US GDP growth by .75% per year.
Regardless of political views, most investors don’t seem to appreciate that economic growth comes from long-term capital formation. The IMF estimates that savings and investment are 70% correlated with economic growth and every 10% of additional investment as a percent of GDP adds an additional 1.5% to country growth rates. Growth in corporate profits comes from the reinvestment of earnings and depreciation, not from continuous margin expansion. Corporate tax rates are 60% correlated with economic growth globally, and corporate tax cuts are the most powerful way to increase national economic growth.
We raised our original 2025 year-end 6,600 target for the S&P 500 Index to 7,000 after the Republican sweep. Our 7,000 target assumes an 18% effective corporate tax rate as we view that as the most likely scenario for the corporate tax rate. It is important to note that the 2025 tax bill will be subject to budget reconciliation rules that require that the 10-year impact on the deficit is neutral, which may result in a compromise on corporate tax rates. Our target is 7,500 if there is a broad-based corporate tax rate of 15%. A reduction of the corporate tax rates not only directly increases corporate earnings but also increases the expected earnings growth as earnings growth is determined by the after-tax return on investment. In fact, we estimate the 2017 corporate tax cut increased the fair-value multiple on the S&P by a full 3 points, making historical comparisons of today's earnings multiple to historical multiples irrelevant. supported by lower interest rates in the 3.5-4.0% range.
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