Earlier this week, I attended the Exchange Conference in Miami Beach.  One of the speakers was Jeremy Grantham, of GMO, a well-respected, multi decade institutional investor.

He went to great lengths to point out that while the equity markets in America are overvalued by many historical measures, we have the best economy on the block.  In fact, he noted that since 2015 the rest of the industrialized world has not participated in our economic boom.

He didn’t seem to be able to come up with a reason why.  For instance, they also had low interest rates and went on a Covid fueled fiscal spending spree.  Yet they almost all have slowed down in recent years.  Why not us too?

It made me think.  What is different here?  After pondering a bit, I now have a theory.  The Tax Cuts and Jobs Act (TCJA) took effect in 2018 and brought the corporate income tax rates down from the mid to upper 30’s to 21%.  It is a huge cut by percentage. 

It did a few things.  It brought our corporate tax rates down to levels comparable to most of the rest of the developed world.  No longer would our multinational companies have to keep profits earned overseas, offshore to avoid more taxation upon repatriating them, or be at a disadvantage competing with foreign companies.  It increased profits and Return on Equity for many, so they could raise additional capital at more favorable terms.  Most crucially, it created more cash and retained earnings that could be reinvested in growth, development, and technology.  This created jobs, efficiency and growth.

Was this the catalyst?  Did companies largely divert spending from Uncle Sam to investing in their own growth, productivity, and efficiency?  This investment has been despite higher interest rates.  Efficiency equals economic growth.

The overall earnings of the S&P 500 firms have moved up some 50%+ since the TCJA took effect.  This has meant more economic growth, more jobs, and more innovation, such as AI.  This is the real trickle down.  Every American benefits.

The Bottom Line:  Capital serves us better in the private sector than in government hands.