Are S&P 500 Companies as Optimistic on Tax Reform as the Stock Market?

The S&P 500 and Dow Jones Industrials Average hit all-time high values during the past week. One reason commonly cited for the recent increase in the value of these indices is renewed optimism that Congress will pass tax reform legislation soon.

According to President Trump, “Under our new framework, you will dramatically cut the business tax rate so that American companies and workers can win against those foreign competitors who are winning, in many cases, because they have an unfair advantage.  We will cut the corporate tax rate from 35 percent and more, all the way down to no more than 20 percent—below the average of our major competitors from other countries.” 

During each corporate earnings season, it is not unusual for companies to comment on subjects that had an impact on their earnings and revenues for a given quarter, or may have an impact on earnings and revenues for future quarters. While the majority of S&P 500 companies will report earnings results for Q3 2017 over the next few weeks, approximately 12% of the companies in the index (59 companies) had reported earnings results for the third quarter through Wednesday (October 18). Given the renewed focus on tax reform by President Trump and Congress, have companies in the S&P 500 commented on “tax reform” during their earnings conference calls for the third quarter?

To answer this question, FactSet searched for the term “tax reform” in the conference call transcripts of the 52 S&P 500 companies that had conducted third quarter earnings conference calls through October 18.

Of these 52 companies, 13 cited the term “tax reform” during their call. This number is above the number for Q2 2017 (5) and the number for Q1 2017 (11) through the same point in time in the earnings season. However, it does trail the number for Q4 2016 (14).

Ten of these 13 companies expressed some positive sentiment about the potential passage or potential impact of tax reform. However, six companies also discussed some uncertainty around the timing or specific details of tax reform. Five companies stated that they (or their clients) were not going to change their outlook or strategic planning decisions due to the renewed focus on tax reform in Washington. 

What Are Companies Saying? 

Here's a selection of quotes from the calls mentioned above.

 “And, secondarily, I'm still waiting to see on tax reform what that might do, and that could have an impact on our spending as well.” –FedEx (September 19)

“Now we still believe that we're going to see tax reform or some evolution that's going to be good for the business but on balance…” –Accenture (September 28)

“This week, the bipartisan proposal came out, but it's really important that we understand the details, right, more specifics around the corporate tax rate reduction, any limitations on certain deductions, which would obviously impact us. But generally speaking, I think the legislation should benefit companies that have a higher percentage of their business in the U.S., which would be us.” –ConAgra (September 28)

“The macro environment remains a largely positive one. Growth, while not as high as we would like, remains consistent and we don't see too many economies in distress….And while tax reform remains a question mark, we do like the direction the administration is going in terms of regulation….So I think as you look around the world today and if you look at the forecast being put out in terms of 2018, at the top level right now, growth is predicted to improve both in the developed and developing markets…Developed markets, we probably were somewhere around 1.5% last year, forecasted just a bit above 2% this year and I think we start to bump up hopefully towards 2.5% next year. And if we get tax reform here in the U.S., obviously, that'll act as a catalyst to those numbers.” –Citigroup (October 12)

“The reality right now is, although I think everyone, and ourselves included, are hopeful obviously that tax reform is done for the right reasons and that the economy responds accordingly. At this point it's not front-and-center in the dialogue we're having with our clients about whether they should or shouldn't do a strategic deal or take an action. So I would say it is neither holding up business nor spurring business, but that could change. So at this point I'd say it's a factor, but not a driving factor and that could change.” –JPMorgan Chase (October 12)