Bloomberg News reported that Republican Sen. John Cornyn said lawmakers may have a tentative tax deal today. The major indexes jumped to session highs shortly afterward.
"I think that is the catalyst for the market going up here," said Anthony Conroy, president at Abel Noser. He also noted that banks were rising ahead of the Fed's monetary policy announcement on Wednesday.
Republican lawmakers — who hold a majority in both the House and Senate — are pushing for a revamp of the U.S. tax code by year-end which would significantly lower corporate taxes. But after passing separate tax bills, House and Senate lawmakers must agree on a joint bill to be sent to President Donald Trump.
The prospect of lower corporate taxes has been a boon for U.S. stocks this year as they have ascended to record highs.
In light of potential changes, the Fed may be forced to increase its economic and interest-rate outlooks.
The U.S. central bank began a monetary policy meeting on Tuesday. Peter Cardillo, chief market economist at First Standard Financial, said he does not expect any major surprises from the Fed this week. He noted, however, that if the central bank adopts a more hawkish stance, it could "scare the heck out of the market."
The Fed is largely expected to announce an interest rate hike on Wednesday at 2 p.m. New York time. Market expectations for a 25-basis-point rate increase were at 87 percent on Tuesday, according to the CME Group's FedWatch tool.
"I think investors will be looking for guidance about 2018 given the leadership changes," said Eric Stein, co-director of global income at Eaton Vance.
Fed Governor Jerome Powell is set to take over as Fed chair for Janet Yellen once her term ends in February. "Though I think that Powell is the closest thing to Yellen you can get" in terms of approaching monetary policy, said Stein.
The Fed is currently forecast to raise rates three times next year.
"Tax cuts have not been factored into the Fed's rate hike projections and represent an upside risk to growth," said Alberto Gallo, partner at Algebris Investments.
In corporate news, Boeing shares surged 2.4 percent after the company raised its dividend and approved an $18 billion buyback.
Verizon's stock, meanwhile, rose 2.6 percent after Nomura upgraded it to "buy" from "neutral." Nomura also raised its price target on Verizon to $61 per share from $47, representing a 17.7 percent upside from Monday's close.