Why This Earnings Season Matters More Than Most | The Mesh Report

Why This Earnings Season Matters More Than Most

Dividend Sensei April 21, 2017 Comments Off on Why This Earnings Season Matters More Than Most

I’m not a big fan of earnings season. In my view this quarterly look at a company’s results creates the very short-term bias that is the root cause of so many regular investors underperforming the market in the long-term. After all, owning shares means owning a piece of a real, tangible company. One that you plan to own for years, decades, or even forever.

And with Wall Street analysts often trying to parse every little tidbit out of each release, (plus the quarterly conference call), it mainly just creates a lot of useless noise. In fact the only reason I’m not against companies moving to an annual reporting system is purely because of all the crazy price swings that market overreactions to earnings can create. This often results in fantastic buying opportunities for those of us who are smart enough, but more importantly, patient enough, to ignore this quarterly circus.

However, on rare occasions earnings season can shed important light on broader trends. That’s the case with the current period, but not because of the results of any one company.

Why does this earnings season matter? Because we just exited an earnings recession that lasted for six months. In addition, the market’s recent rally was predicated on the EPS boosting effects of promised fiscal stimulus, including: a 75% decrease in the corporate tax rate, large scale deregulation, and massive infrastructure spending.

However, as the recent failure of healthcare reform shows, getting anything important done in Washington is much easier said than done. In fact, Treasury Secretary Steven Mnchin, who is leading the tax reform effort, has pretty much admitted that getting reform done by August (it was originally supposed to be done by May, before the timeline was pushed back), will be impossible.

And given that the last time tax reform passed, back in 1986, it took two years and that was with massive bipartisan support. The reason that tax reform is so much harder than simply cutting taxes, is because rather than just tweaking rates within the present framework,  reform means completely changing the rules. Specifically the goal is to simplify the code, and make it more efficient, and thus able to generate the same revenue with less economic impact, (faster growth).

Right now the plan, as far as we know, is for corporate and individual income tax rates, to be lowered, with the revenue made up by the elimination of almost all deductions (as well as a 20% Border Adjustment Tax). However, remember that the reason the tax code is 75,000 pages long is because lobbysts have spent nearly a century inserting special favors for their clients.

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