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Tax reform in focus — What you need to know on Friday

Myles Udland
Markets Reporter

Tax reform will remain the key focus for investors as the economic and earnings schedule slow down on Friday.

The economics calendar will give investors readings on manufacturing activity in New York State and industrial production in the U.S. while the earnings calendar has no major reports due out.

Investors will be closely watching developments out of Washington, D.C. into the weekend, however, as Thursday brought new challenges for Senate Republicans trying to get a deal on tax reform done by the end of 2017.

On Thursday, Republican Senators Marco Rubio (R-Fla.) and Mike Lee (R-Utah) added new wrinkles to the current progress on getting a tax bill to President Donald Trump’s desk by the end of the year.

Marco Rubio says he won’t support the current GOP tax plan.

Rubio, who had previously discussed his displeasure with the bill leaving out an expansion to a child care tax credit, said Thursday he opposes the current deal while Lee said he is undecided. Tennessee Senator Bob Corker has also not said if he supports the current version of the bill. Senate Republicans can only afford to lose two votes to still pass the measure.

S&P 3,000

On Thursday, strategists at JP Morgan unveiled their outlook for the stock market in 2018.

And they’re bullish.

The firm’s equity strategy team led by Dubravko Lakos-Bujas said Thursday that the investing environment in 2018 should remain supportive of further gains in the stock market. JP Morgan notes that global growth, low inflation, and easy monetary policy powered stock market gains around the world in 2017. And while these factors should remain in place next year, the firm sees the Trump administration giving investors another boost in 2018.

“We believe progress on GOP/Trump policy initiatives (i.e. lower corporate taxes, reduction in regulatory burden) should be a significant source of upside for equities and drive further rotation from Growth to Value styles and across sectors,” writes Lakos-Bujas.

“After two consecutive years of multiple expansion…we believe valuation will likely remain elevated and expected [the] S&P 500 to reach 3,000 by [year-end] 2018.”

This forecast makes JP Morgan the second sell-side firm to put a 3,000 price target on the benchmark stock index for 2018, joining Oppenheimer. And this call supports the overall theme of Wall Street’s outlook on 2018, which is that it will be another good year for stock market investors.

But Lakos-Bujas’ colleague at JP Morgan, Marko Kolanovic, cautioned in another note published Thursday that while 2018 might be another strong year for markets, risks should accumulate in the second half of the year.

“Tail risk for equities and other risky asset classes will increase in 2018,” Kolanovic writes.

“Our analyses point to significant impact of monetary stimulus removal on levels of risk premia across asset classes, levels of leverage, and valuations. However, asset classes may not react immediately, and like a ‘frog being boiled’ tail risks may be realized with a significant delay and triggered by an unrelated catalyst.”

Kolanovic, who has been one of the most widely-cited analysts on Wall Street when it comes to connecting price moves across assets and sectors, also adds that modern markets don’t lend themselves to neat forecasts about what the future will bring.

“Annual price targets may be remnants of times when markets were less efficient, market reaction times slower and investors less sophisticated,” Kolanovic writes. “In the age where quantitative/derivative investors and technology (e.g. big data and AI) compress the time horizon of market reactions, it is likely impossible to predict price levels 1 year out.”

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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