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UBS sees bull case for 'tax-fueled' 25 percent surge in S&P 500 next year

  • Keith Parker, new UBS chief U.S. equity strategist, is looking for the S&P 500 to end next year at 2,900, a healthy gain from its current 2,650 level.
  • But with the right mix of tax law juice, a case can be made where it leaps ahead to 3,300, he said.

Keith Parker, new UBS chief U.S. equity strategist, is looking for the S&P 500 to end next year at 2,900, a healthy gain from its current 2,650 level. But with the right mix of tax law juice, a case can be made where it leaps ahead to 3,300, he said.

The details of a final tax bill are still unclear, but in the House and Senate plans, approved Friday, the corporate tax rate is reduced to 20 percent from the current 35 percent. Companies that pay high taxes have been rallying, while those with the least to gain are getting flogged.

The Wall Street Bull sculpture is seen in the Financial District on December 8, 2016 in New York.
Bryan R. Smith | AFP | Getty Images
The Wall Street Bull sculpture is seen in the Financial District on December 8, 2016 in New York.

"By our estimate, a tax cut is 20 to 40 percent priced, a little more after today," Parker said on CNBC's "Halftime Report."

Parker said the S&P 500 could see a 9.5 percent earnings boost from a 20 percent tax rate, and he has not yet priced that into his model. That could help drive the S&P much higher than his official target of 2,900, even as high as 3,300 — a 25 percent gain from current levels.

He said the biggest beneficiaries of lower tax rates include telecom, financials and consumer discretionary companies, and they typically have price-to-earnings ratios that are at a discount to the S&P.

Tech has been selling off in recent sessions and it took the Nasdaq lower Monday, as the Dow and S&P 500 charged ahead. Parker said semiconductors have been under the most pressure because they don't benefit much from the lower tax rate.

He said in tech, services and software should fare better than semiconductors, particularly since there is an incentive for corporate capital spending.

"As we've been trying to digest the details of the House and Senate plans, there are risks around offshore earnings," he said. Companies will fall under a new territorial tax plan that does not tax overseas earnings, but the Senate bill includes a tax on overseas income from intangibles.