The difference maker for stock market to extend its gains could be President Donald Trump’s tax reform.
The president signed the Republican tax overhaul in December, which permanently lowered the corporate tax rate to 21 percent from 35 percent. The bill reduced tax rates on individuals across the board and nearly doubled the standard deduction — although those changes are in effect only from 2018 through 2025.
As a result, economic growth is accelerating and corporate revenues are booming.
The government said last month that second-quarter GDP grew at 4.1 percent, the fastest pace in nearly four years. In comparison, the euro zone grew only 1.4 percent in the same period, the lowest growth rate since 2016.
Perhaps no single company is a better barometer of economic health than Walmart, the country’s largest retailer. In 2016, the company said more than 40 percent of the U.S. population, or 140 million people, shopped at Walmart on a weekly basis.
Last week, Walmart reported sales growth that was better than at any time in the past decade.
The retailer’s shares closed up 9.3 percent last Thursday, 16 after it posted its highest domestic same-store sales growth in more than 10 years for its second quarter. Walmart reported an increase of 4.5 percent versus the Thomson Reuters estimate of 2.4 percent.
To be sure, the fiscal stimulus from lower tax rates and increased spending may sow the seeds of the rally’s eventual demise.
Former Federal Reserve Chairman Ben Bernanke in June cautioned how Trump’s tax reform may lead to difficulties in a couple years as the boost wears off.
“What you’re getting is a stimulus at the very wrong moment that the economy is already at full employment,” Bernanke said at the American Enterprise Institute on June 7. “So you’re getting hit by a big stimulus … under current law it’s going to hit the economy in a big way this year and next year, and then in 2020 Wiley E. Coyote is going to go off the cliff and going to look down. That’ll be essentially withdrawn at that point.”
But the market may not discount a stimulus lapse that far out in the future as long as the economy keeps accelerating into next year.
With mounting evidence from major corporate bellwethers that the U.S. economy is still improving, investors should take solace the stock market rally will likely keep going as well.