Is Tax Reform A Done Deal? This Is What Wall Street Thinks

Following the backing of Sen. John McCain on the GOP tax reform bill, markets have surged to new all time highs as tax-sensitive banks lead the way, with Bloomberg reporting that odds for the tax bill"s passage may increase to "near-certainty" if the Senate can finish its version in the days ahead, citing Evercore ISI.  And speaking of banks, the KBW bank index is up over 1.3% to the highest since Oct. 2007, outpacing the S&P 500’s 0.7 percent gain. This is just more of the same: since Trump"s election, banks have outperformed dramatically with the BKX up 40% vs S&P 500 +24%; top performers include SIVB (+86%), BAC (+68%); Citigroup (+52%); JPMorgan (+51%).

So at least according to bank stocks - and the market - tax reform appears to be a done deal. This is confirmed by online betting market PredictIt, where odds for a tax deal by the end of 2017 have jumped to 76%, up from 40% three days ago.

 

But do Wall Street analysts agree? As the following summary from Bloomberg shows, opinions range from Evercore"s 75% odds of a deal getting done by Q1 at the latest, with some such as Horizon Investments suggesting corporate tax rate may have to settle at 22% (especially if Trump "blows a gasket"), to pessimists such as Bloomberg Andrew Silverman stating that "the Senate will have tough time passing first stab at ax-overhaul, contrary to equity markets’ expectations for successful reform, as many have doubts about the bill and margin for failure is 2 votes."

Here is a full run down of some analyst views on the state of tax reform, courtesy of Bloomberg.

EVERCORE ISI (Terry Haines)

• Taxes on track for Senate approval in next few days; keeps 75% odds tax legislation happens by early 1Q at the latest; odds may increase to near-certainty if the Senate can finish its version of the bill by the end of this week or early next week


• Sees govt shutdown as very unlikely, with odds at most 10%


• Says don’t be distracted by posturing this week on both sides of the aisle; no one in Washington wants a shutdown, full-year spending deal that keeps govt spending stable, but with small increases for defense and domestic spending has been in negotiations for weeks

HORIZON INVESTMENTS (Greg Valliere)

• The one wild card that could disrupt tax reform process is "the increasingly erratic" President Trump, whose tweets this week (Access Hollywood, Obama’s birthplace, fight with U.K. PM May) have alarmed even his supporters; raises issue as Trump "could blow a gasket" if tax bill fails to give him what he wants for business, corporate rate may have to settle at about 22%


• Calls Corker trigger "a terrible idea"; asks whether tax hikes would be welcome if there’s a recession in next few years, or geopolitical issue; notes corporations may find it difficult to make long-term plans if their lower taxes are threatened by Corker amendment

COMPASS POINT (Isaac Boltansky)

• Still believes Senate will clear its tax package this week


• Then, House could consider the measure, pass it in early December, or there may be conference cmte that may bleed into 2018


• Sees conference as likelier path; keeps 75% odds of package being enacted regardless of procedural road ahead

COWEN (Chris Krueger)

• Congressional GOP has seemingly made calculation that "passing nothing on taxes is worse than passing something" 


• Notes "dueling" bills are receiving waves of negative news coverage across Trump and Clinton state papers


• Two questions remain: Tax trigger mechanism, how to pay for "new policy candy" to secure 50 votes

BLOOMBERG INTELLIGENCE (Andrew Silverman)

• Senate will have tough time passing first stab at ax-overhaul, contrary to equity markets’ expectations for successful reform, as many have doubts about the bill and margin for failure is 2 votes


• Too many uncertainties remain to predict a quick passage, and senators won’t know what they’re voting on until after "vote-a-rama," when the bill is rapidly amended on the floor


• Sees debate stretching into 2018

Source: Bloomberg