Market is trading solely on Trump’s fiscal policy chances, Barclays says

Donald Trump
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Barclays told clients the market's assessment of the probability of President Donald Trump's economic plan becoming law will drive the return the rest of the year.

"In our view, a tax plan is unlikely to be passed in 2017, but there will a proposal for markets to price. Through the course of 2017, we expect that the S&P 500 will trade with an embedded 'fiscal option' with the value of that option dependent on the size of the plan and the market assessed probabilities," strategist Keith Parker wrote in a note to clients Tuesday.

Parker's price target for the S&P 500 is 2,525, representing 6 percent upside from Monday's close.

Although he is optimistic for the year, he noted the "path will be uneven" depending on new developments.

"Equities sell off at some point in every year, and 2017 will be no different with the natural oscillation of data and politics," Parker wrote. "Weak equity markets on policy disappointment will likely prompt Republicans to action given their current (and potentially fragile) control of all three branches of government."

The strategist cited how a corporate tax rate reduction to 25 percent would benefit S&P 500 earnings by 8 percentage points.

"Outperformance potential … for those stocks that benefit the most from a 25 percent tax rate (vs. the least) also keeps us long the tax cut theme," Parker said.

For investors who want to trade the prospect of the tax reform being implemented, here are five companies Barclays says will gain from a lower corporate tax rate.

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