Watch out for this big corporate earnings boost

If you are desperate for some good news amid the global market turmoil that’s threatening to knock the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index lower this morning, you may not have to wait long.

US President Donald Trump is reportedly close to announcing new tax cuts to help Republicans avoid an electoral wipe-out at the mid-term elections next month.

That is great news for the share prices of US companies but our market is likely to bask in the sunshine too given that the ASX often takes its cue from the US market.

The first round of cuts to US company tax and personal income tax were credited for the big earnings uplift in corporate America, although some of these cuts are temporary.

Trump surprised many on the weekend by announcing his intentions to lower taxes for middle-income Americans and to make some of the temporary tax changes in the first-round permanent.

The move is to counter criticism that the initial tax initiatives only benefitted companies and the wealthy. Trump and the Republican Party were counting on the original cuts to boost their popularity but many voters have not been won over.

I am expecting the new round of tax cuts to give the S&P 500 a big shot-in-the-arm, as such tax measures normally do, and that is great news for our large-cap stocks – although there’s a sting in the tail.

But first the good news. ASX companies that are leveraged to the US consumer like logistics group Brambles Limited (ASX: BXB), household appliances maker Breville Group Ltd (ASX: BRG), packing group Amcor Limited (ASX: AMC) and consumer financing solutions group Afterpay Touch Group Ltd (ASX: APT), are likely to benefit from this new tax tailwind.

The downside is that this boost in investor sentiment will only be fleeting because of the US government budget blowout, which has already hit a six-year high of US$780 billion.

Investors don’t appear too worried about the budget hole (one of the advantages when your dollar is the reserve currency of the world) but I suspect this will become more of an issue in 2019 if the new tax cuts are implemented without any reduction in government spending.

But Trump is a big-debt kind of guy and you only need to look at his track record as a businessman. He is very comfortable with high-octane leverage and he’s not afraid to spend to win.

This development only reinforces my belief that we will get one last hoorah before the chickens come home to roost.

There are many potential issues that can kill this bull market but US government indebtedness leading to a spike in bond yields has to be one of the biggest risks to equity markets in 2019.

But that’s something to worry about next year. Right now, we should enjoy the sunshine while it lasts.

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Motley Fool contributor BrenLau owns shares of AFTERPAY T FPO and Brambles Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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