Equity Strategy Focus Point Death and tax reform Quantitative Analysis 29 January 2017 Corrected Unauthorized redistribution of this report is prohibited. This report is intended for [email protected] Deep dive on corporate tax reform OK, maybe it’s not as inevitable as death and taxes, but some form of corporate tax reform seems likely. It is a stated priority of President Trump and has widespread Congressional support. We here focus on four components that could have big equity implications. We assess the impacts at a market, sector, and industry level, and plan to update and augment this work as more details come to light. Potential near-term boost to EPS, long-term impact varies Our 2018 S&P 500 EPS estimate of $137 already implies healthy two-year growth of +16%. Tax reform in its entirety could add as much as $5-6 to near-term EPS, as benefits are frontloaded. The sustained impact depends: under a 20% tax rate, the Blueprint would be modestly accretive; under a 15% rate, this annual benefit could triple; but a 25% tax rate that would appease the deficit hawks could shave $3.50 off of earnings each year. We also estimate a one-time $8-9 charge to GAAP EPS associated with the repatriation tax (Table 1). Cutting corporate tax rate could add $8 to EPS Our starting point is the US statutory corporate tax rate. If it were lowered from 35% to 20% and the US moved to a territorial tax system (no longer taxing foreign profits), it would boost S&P 500 EPS by an estimated 12% ($17 to 2018 EPS). We assume companies would be able to retain half of the benefit ($8) and the remainder would be passed on to customers or competed away. For instance, a lasting impact to Utilities' profits is unlikely, as the benefit would be passed on via regulated pricing. Repatriation: Buybacks could boost EPS by 3% Both Trump and the Blueprint support a mandatory (as opposed to 2004's optional) tax of overseas earnings of US firms’ subsidiaries at reduced rates. Non-Financials in the S&P h