American companies are celebrating the completion of the long-needed tax reform that was signed in November. Many are raising their profit targets, and some are even raising wages and handing out bonuses in anticipation of the windfall. Theo Francis writes:
The announcements come as companies begin to report what are expected to be strong fourth-quarter financial results. A major focus will be executives’ expectations for how their operations and results this year will be affected by the tax law, which lowered the corporate rate to 21% from 35% and ended U.S. taxes on most future foreign income.
“The macro environment is as positive as we’ve seen in many years,” Citigroup Inc. Chief Executive Michael Corbat told investors Tuesday morning. “Tax reform could change the sentiment among those making investment decisions from optimism to confidence and become the boost the U.S. economy needs to drive growth higher.”
UnitedHealth Group Inc. and FedEx Corp. have raised profit targets for 2018, citing the tax law. Companies including laboratory operator Quest Diagnostics Inc. have predicted sharply lower effective tax rates starting this year. For a few companies, including Citigroup and General Motors Co. , the legislation will result in big accounting charges in the current quarter.
Overall, analysts expect S&P 500 companies to mark their sixth straight quarter of earnings and revenue growth. Profits are expected to jump 11.9% over the final quarter of 2016, while revenues are expected to rise 7%, according to a projection from Thomson Reuters. As of Tuesday afternoon, just 30 index companies had reported their latest results.
Corporate profits have been powered by a healthy economic expansion, especially in the U.S. Low unemployment has spurred spending by consumers and improving sentiment and demand have stirred business investment, economists say. A forecast from the Federal Reserve Bank of Atlanta projects 3.3% growth in the gross domestic product for the fourth quarter, well above a postrecession pace of about 2%.
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Jeremy Jones, CFA
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