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Tax reform is crucial for the market, strategist says

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Beware a market sell-off if a tax reform bill gets passed: Pro

The market's next move will hinge on efforts to cut corporate taxes, one strategist said in a recent interview with CNBC.

Equity markets have priced in a lot of "good news" since the election, said Larry McDonald, head of global macro strategy at ACG Analytics, and the hope is largely that tax reform will get done.

"In the last couple of weeks, we've had a number of new data points that have led us to believe that the probability of tax reform is rising," McDonald said Tuesday on CNBC's "Trading Nation. "

"Republicans' backs are against the wall. You're talking about a 2018 midterm election that could be disastrous if they drop the ball here. They've already dropped the ball on health care. Tax reform and tax cuts is something they must deliver, or they'll lose a substantial amount of seats in the House, and even the Senate," he said.

Indeed, the argument has been made that much of the so-called "Trump rally" is due to hopes around a tax reform package that would benefit equities.

Goldman Sachs said Monday that there is a 65 percent chance of an agreement on tax reform coming together next year. That would benefit stocks, the firm said.

McDonald said there is a 60 percent chance of some kind of reform passing this year, with a 90 percent likelihood of such a passage between Tuesday and Feb. 1 of next year.

"Once the news comes out, there's a real rush for the exit, so we recommend clients be very careful here with tax reform," he added.

Small-cap stocks, such as those in the IWM exchange-traded fund, as well as financial stocks, would benefit from tax reform, McDonald said.

CNBC reported last week that Republicans' recent attempts to court Democrats on tax reform had missed the mark.