JPMorgan: Investors should rotate into these sectors with GOP tax plan

Published Mon, Dec 4 20174:17 PM EST

With the Republican tax plan headed to the bicameral conference committee, JPMorgan is encouraging investors to make some tweaks to their portfolios. A reduced corporate tax rate like that proposed in the GOP tax plan may be just the type of catalyst the market needs to spark rotation into value and away from growth stocks, according to strategist Dubravko Lakos-Bujas. "We viewed the U.S. Tax legislation as the most significant upside catalyst for equities given the market was underpricing the probability of passage," explained Lakos-Bujas in Monday's note to clients. "While the tax trades have been gradually moving higher since the House passed its bill mid-November, the rotation across styles, sectors, and specialized portfolios accelerated on legislative progress last week. In fact, some of the moves appeared panicked." The Republican Party has been hard at work to pass a comprehensive tax overhaul by the end of the year, eager to give President Donald Trump his first major legislative achievement since taking office. A key component of the plan, a reduction of the corporate tax rate to 20 percent, will likely provide relief to highly taxed companies. "Consistent with our view, we saw rotation into Value from Growth, into domestic sectors from multinationals and pass-through entities, and into Tax Outperformers from Underperformers," penned Lakos-Bujas. The effect of tax cuts could be so pronounced that the S & P 500 is set to reach 2,800 by early next year, according to the strategist. "With this catalyst gaining momentum, we now also advocate fully rotating into Value from our current "barbell" type portfolio (Growth + Value) which we have held since the third quarter," continued Lakos-Bujas. "Consistent with this style view, we maintain overweights on reflation-sensitive financials, energy and materials, and are upgrading industrials to overweight (from Neutral)." The strategist's recommendation came as telecommunications, financials and materials – three sectors largely unloved until the back half of 2017 – led the S & P 500 sectors toward a 0.2 percent gain on Monday. Boeing, a jewel industrial of the American economy, led the Dow Jones industrial average in its 125-point surge on the week's first day of trade.

A worker uses a heat gun to smooth out the wrinkles on a car seat during production at the Lear Corp. manufacturing facility in Hammond, Indiana.

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With the Republican tax plan headed to the bicameral conference committee, JPMorgan is encouraging investors to make some tweaks to their portfolios.

A reduced corporate tax rate like that proposed in the GOP tax plan may be just the type of catalyst the market needs to spark rotation into value and away from growth stocks, according to strategist Dubravko Lakos-Bujas.

"We viewed the U.S. Tax legislation as the most significant upside catalyst for equities given the market was underpricing the probability of passage," explained Lakos-Bujas in Monday's note to clients. "While the tax trades have been gradually moving higher since the House passed its bill mid-November, the rotation across styles, sectors, and specialized portfolios accelerated on legislative progress last week. In fact, some of the moves appeared panicked."