ETF Securities Research Blog

US healthcare repeal a crucial test of Republican Party discipline

News last night that President Trump’s healthcare bill has been delayed has worrying implications for Congress’ approval of other electoral promises, particularly when so much optimism for their approval appears priced into equity markets.

Data from the American Community Survey and the Department of Labor highlight a close correlation between rises in healthcare coverage and employment. A scaling back of the Affordable Health Care Act as proposed by President Trump has consequently caused some friction in Congress. The delays so far have been caused primarily by the Freedom Caucus, which consists of roughly 30 Congressman who’s mission statement is to give a voice to American’s who feel Washington does not represent them.

The Freedom Caucus is precisely the group that should be supporting President Trump, the fact that they are resisting now is a worrying outcome for other reform plans. Particularly the tax reforms, which are likely to be funded by a form of border adjustment tax. A border adjustment tax would be particularly damaging to US farmers who export considerable volumes of cereals, meat and dairy products to Mexico, Japan, South Korea, Canada and China. This potential damage to farming is unlikely to be overlooked by Congress members and cause delays in approval.

We question if it is right for investors to be so optimistic about various reform plans when equity valuations are so high. The main reason for optimism over corporate earnings growth this year is the prospect of corporate tax cuts, coupled with a tax amnesty on repatriating corporate cash piles. These could lead to an increase in share buybacks, in turn boosting earnings. However, we believe it is likely that these promised tax reforms will be delayed given the lack Republican Party discipline. Furthermore, without the revenue from a border tax, it’s difficult to see approval of tax reforms in Congress.

The consensus for earnings growth expectations in 2017 according to Bloomberg are 18% year on year, a lack of reform could see falls in expectations towards the longer term average of 4.8%, we believe consensus remains way too optimistic.

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