Market Insider

Brace for a market dip when Trump's tax reform plan finally lands

Key Points
  • When highly anticipated tax reform hits, it could be a sell-the-news event, some analysts say.
  • President Donald Trump is expected to reveal details on tax reform Wednesday.
  • Each 1 percent reduction in the corporate tax rate delivers more than $1 of EPS growth, Strategas says.
Corporate tax rate concerns

If the market gets clarity this week on how and when tax reform will play out, some analysts say stocks could be vulnerable to a sell-off.

"This carrot that's out there is tax reform," said Bruce Bittles, chief investment strategist at Baird. "I think markets are centered around the likelihood of a tax cut and after that's out, then markets are vulnerable because of high valuations and the fact that a lot of investors are loaded up after six years of a bull market," he said, noting that in his view, the current bull market rally began in 2011.

According to reports this week, President Donald Trump still wants to lower the corporate tax rate to 15 percent, even if it expands the federal deficit. He is expected to unveil more details on the tax plan Wednesday.

Proposed cuts to the high 35 percent U.S. corporate tax rate have been a major factor behind stocks' postelection surge to record highs. So far, equities have held near those levels. The potential of missing out on a boost from tax reform would be great.

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"For investors, each 1 percent reduction in the corporate tax rate delivers more than $1 of EPS growth. Additional EPS growth will come from share repurchases made following a repatriation tax change which will also be included," Strategas' Jason Trennert said in a note Tuesday.

Congress isn't expected to vote on tax reform until this summer at the earliest. Prospects for significant change in taxes dimmed when the Republicans pulled their health-care reform bill in March — Trump has wanted to get past health care before addressing taxes.

Lack of political clarity and geopolitical worries have kept stocks in a range since the last closed at a record on March 1. But Tuesday, the animal spirits were back, pushing the Dow Jones industrial average up more than 200 points to above 21,000 in part because of optimism about Trump's tax announcement Wednesday.

"If they roll out some very vague details, I think the market could take a bit of a stumble from that," said John Caruso, senior market strategist at RJO Futures. "Once it hits the market I think you'll see them selling the news."

— CNBC's John Melloy contributed to this report.

Watch: Trump holds tax meeting with Mnuchin

President Trump holds tax meeting with Sec. Mnuchin