Stock markets soared after Donald Trump won the presidential election last November, for one basic reason: He had promised huge tax cuts, which would boost corporate profits and stock prices.
Stocks are still up, but the outlook for tax cuts has suffered a severe downgrade. “In my opinion, tax reform can’t happen,” Omeed Malik of Bank of America Merrill Lynch said at the recent SALT conference, the annual gathering of money managers in Las Vegas. That pessimistic assessment is becoming the prevailing Wall Street view—even if buoyant stock prices may not yet reflect it.
The various crises surrounding Trump—the abrupt firing of FBI director James Comey, a special counsel to look into his Russia connections, a stubbornly low approval rating—are part of the problem. They puncture Trump’s clout on Capitol Hill and his ability to woo some Democrats to his side. Even fellow Republicans now resist some of Trump’s measures, unworried about potential punishment meted out by constituents back home.
But passing contentious legislation was always going to be tougher than it seemed under Trump, even with Republicans controlling both houses of Congress. “Even though there’s unified government, politically it’s less unified than it looks,” former Federal Reserve chairman Ben Bernanke said at the SALT conference. “They’re all Republicans, but there are very different points of view.” Bernanke said he expects “no major changes” in the tax code under Trump.
David Rubenstein, founder of the private-equity firm the Carlyle Group and an old Washington hand, explained to the SALT audience why he, too, thinks tax cuts are unlikely. “There is no way to pass tax legislation in the Senate with only Republican votes,” he said. Senate rules essentially require 60 votes to pass most legislation, and the Republicans control only 52 seats. Some laws can pass with only a majority, but they must be deficit-neutral, which Trump’s tax outline is not.
It’s possible something small could pass, Rubenstein says, such as a cut in the top corporate rate from 35% to 25%. Trump wants to cut it to 15%, and include a lot of other tax cuts in addition to that. But the loss of tax revenue, at that level, would be too steep for budget hawks in Congress. “If you’re in the investment world and looking for relief from Congress,” Rubenstein told the SALT audience, “you should look elsewhere.”
Wall Street bellwether Goldman Sachs (GS) has institutionalized these declining expectations for the Trump agenda. “The probability that tax legislation will be enacted by 2018 has fallen further, in our view, as a result of recent events,” the influential firm told clients in a recent note. Until recently, Goldman expected tax cuts of nearly $2 trillion during a 10-year period, or $200 billion per year. It has since reduced that outlook to $1 trillion of tax cuts, while noting that if Trump’s approval rating drops further from already-low levels, the likelihood of tax cuts will decline as well.
It’s hard to tell if stock markets reflect the dimming outlook for tax cuts. While stocks have been flat since early March, the “Trump bump” is still there, with the S&P 500 (^GSPC) up 12% since Election Day last November.
Goldman says “post-election policy expectations have mostly unwound” in sectors once expected to benefit most from Trump policies, such as those stuck with relatively high tax rates. And it may be improving earnings and sound fundamentals, rather than the Trump agenda, that are supporting the broader market, for now. For Trump, it’s a convenient time for economic fundamentals to be improving.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman