Home / Top News / JPMorgan raises year-end S&P 500 forecast, saying tax reform will lead to upside surprise

JPMorgan raises year-end S&P 500 forecast, saying tax reform will lead to upside surprise

Lakos-Bujas also expects the U.S. dollar to weaken further, helping the earnings of many S&P 500 companies that sell overseas. A weaker dollar makes their goods cheaper for foreign buyers.

“Our analysis suggests for every ~2% decrease in USD, S&P 500 EPS has historically been revised up by ~1%,” Lakos-Bujas said.

The U.S. dollar hit its lowest against the euro in nearly two years Thursday weakened further Friday. The euro climbed to $1.1677 Friday, a level not seen since Aug. 24, 2015. European Central Bank President Mario Draghi said Thursday the central bank would discuss in the fall when to start cutting back its asset purchases.

U.S. stocks traded slightly lower Friday morning. The major indexes dipped Thursday before recovering following a Bloomberg report, citing a source, that Special Counsel Robert Mueller is investigating the business transactions of President Donald Trump and his associates as part of the larger probe into possible ties during last year’s election between the Trump campaign and Russia. Trump has denied collaborating with Russia and has called the investigation a “witch hunt.”

The Senate also failed again this week to pass a new health care bill, but House Speaker Paul Ryan said Wednesday the Republican-controlled U.S. House of Representatives will start drafting new tax legislation in the fall, after the upcoming summer recess.

Ryan told reporters Thursday that cutting the corporate tax rate to 20 percent is “very realistic.”

“With the healthcare bill sidelined, the GOP is now likely to increase focus on reforming corporate tax,” JPMorgan’s Lakos-Bujas said.

Even if the federal tax rate is reduced a moderate 7 percent to around 28 percent, Lakos-Bujas said he expects S&P 500 annual earnings per share to increase by $8 to $10, implying a roughly 150-point gain for the S&P 500.

Domestic U.S. companies with high effective tax rates, such as those in the financial, telecommunications and health care sectors “should disproportionately benefit under this scenario,” the strategist said.

Sectors most sensitive to corporate tax reform

Source: JPMorgan U.S. equity strategy & global quant research

To be sure, central bank tightening is a factor the JPMorgan strategist expects could send stocks lower.

“While we see market higher by year-end, the Fed and ECB’s inclination to start tapering is a source of downside risk in our view,” Lakos-Bujas said.

JPMorgan economists expect the Federal Reserve Open Market Committee next week to signal it will start reducing its balance sheet in September, the report said. The economists also expect the European Central Bank not to make a decision on lowering asset purchases until October.

— CNBC’s Everett Rosenfeld contributed to this report.

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