Question: Taxes and P/E

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Question: Taxes and P/E

Post by Runalong » Fri Jan 12, 2018 11:06 am

The market is soaring and I'm guessing that the reduction in the corporate tax rate is a big part of it.

Has anyone seen any credible estimates on how the big tax cut will affect median or average P/E ratios?
(Obviously one would have to know how much companies are actually paying now and what they will be actually paying with the changes).

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Re: Question: Taxes and P/E

Post by kosomoto » Fri Jan 12, 2018 11:30 am

From what I've read, banks will be expecting a 20% increase in earnings. Not sure about other sectors.

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Re: Question: Taxes and P/E

Post by bgf » Fri Jan 12, 2018 11:44 am

i like how Warren Buffett recently described it, following this tax cut a 'silent partner' no longer has a claim on 10+% of corporate profits... earnings are going to increase and the massive but relatively short-lived reduction in earnings due to the financial crisis in 2008 are going to drop out of the Shiller PE...

so, you have a substantial increase in earnings simply for tax reasons plus, with respect to PE10, you have a period of incredibly low earnings dropping out of the calculation...

all this to say, if prices remain static, PE will drop substantially.

at this point, no one can tell you what real 2018 earnings will be or what the PE will adjust to as they are reported throughout the year...

"The tax act is a huge factor in valuation," he said on CNBC's "Squawk Box" on Wednesday. "You had this major change in the silent stock holder in American business who has been content with 35 percent ... and now instead of getting 35 percent interest in the earnings they get a 21 percent and that makes the remaining stock more valuable."

The billionaire chairman and CEO of Berkshire Hathaway also explained the magnitude of the tax cut is not reflected in the stock market yet.

"I think 21 percent was not baked in. That's a huge reduction," he added."

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