Even modest corporate tax reform could send stocks soaring higher, potentially adding 150 points or more to the S&P 500, according to JPMorgan.
The GOP tax plan envisions a cut in the corporate rate to 25 percent from 35 percent. If the lower level is achieved, earnings per share for the S&P 500 could increase by more than $10, wrote Dubravko Lakos-Bujas, JPMorgan’s head of U.S. equity strategy, in a note on Tuesday.
He added that if tax reform is ultimately successful, the S&P 500 could climb as high as 2,700. Lakos-Bujas explained his position Tuesday on CNBC’s “Halftime Report.”
“I think there is some priced in the equity beta broadly, so if tax [reform] doesn’t go through: Will it be a disappointment? Yes it will. But on the other hand if it does go through I think there is a potentially higher leg in the market.”
S&P 500 index price since January
Stocks have already notched record gains over the past week, adding to an impressive year for the S&P 500. In morning trading Tuesday, the index hit a record high, 2,555.22, and it is up nearly 14 percent since January. Information technology and health care have led the charge; both S&P sectors have climbed more than 19 percent this year.
“I think there is a potentially very big rotation that could take place in the market,” continued Lakos-Bujas, “from your growth trade into value, from multinational into domestic, from large into small.”
The proposal to cut corporate taxes and lower rates on high earners is facing resistance from both sides of the political aisle. While Democrats argue that slashing taxes and removing the estate tax is a giveaway to the rich, a number of Republicans are focused on a ballooning $693 billion budget deficit and the $20.4 trillion national debt.
As far as earnings are concerned, Lakos-Bujas said he expects another “solid” season.
“In our view, the macro backdrop remains supportive for earnings growth (y/y) with lower U.S. Dollar, a goldilocks scenario for Financials with expanding net interest margin and multi-decade low credit costs, and rising commodity prices,” he explained. “Looking ahead, we see S&P 500 2018 consensus EPS upside.”
Big financial companies report this week, including BlackRock, Citigroup, JPMorgan Chase, and Bank of American Merrill Lynch.
To be sure, while JPMorgan remains positive, Wall Street analysts have been slightly more apprehensive toward the October earnings season. The past two quarters saw especially good earnings numbers, with an average of 73 percent of S&P 500 companies beating expectations.
CNBC’s Michael Bloom contributed to this report.