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UBS: Stocks could surge 25% if the Republican tax bill passes

Joe Ciolli
Trump NYSE

AP/Kathy Willens

  • The Republican Tax Cuts and Jobs Act is expected to have its final Senate vote on Friday.
  • UBS says that a successful passage could lead to 25% upside for the S&P 500, driven by a rotation into the companies set to benefit most.

The stock market is increasingly pricing in the possibility of a successful GOP tax bill. But UBS says investors are only just starting to scratch the surface.

The firm forecasts that the S&P 500 could hit 3,300 in 2018 if a corporate tax cut ends up passing, which is 25% above the benchmark index's current level. UBS figures that the market is currently factoring in only a 20-40% probability that a tax cut will occur.

A lower tax rate would also translate to better corporate earnings, which have been a huge driver of stock gains during the market's 8 1/2-year bull run, UBS said. The bank's analysts estimate that a cut to a rate between 20 and 25% would give the S&P 500 an earnings-per-share boost of 6.5 to 9.5%.

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UBS' forecast comes after a so-called rotation sent the stock market spinning on November 29, with the year's best performers giving way to laggards. On a day when tech stocks, which have boomed in 2017, took a 2.6% beating, companies paying the most taxes — such as retail, road and rail, telecom, banks and healthcare services — surged more than 2%.

The firm says you can expect more of this type of rotation going forward, should tax reform make more progress. It also sees other aspects of the GOP tax plan boosting prospects for US corporations.

"Immediate expensing of capex would be an incremental positive for higher corporate spend, with conditions already supportive given higher profits and stagnating productivity," strategist Keith Parker wrote in a client note. "We believe a tax cut and immediate capex expensing would be an incremental catalyst."

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