As tax talks in Washington intensify, one of the big banks predicts further market upside if a credible reform package arrives.

JP Morgan reportedly predicts that US stocks can rally further because investors are unduly concerned that lawmakers and President Trump will not agree a tax bill.

Derivatives strategist Shawn Quigg has urged investors to buy call options on companies that will benefit the most from tax reform, according to CNBC. "We think the most significant near-term upside catalyst for equities is still ahead - passage of the US Tax Bill. Our analysis indicates the market is significantly underestimating the probability of tax reform passage," Quigg wrote earlier this week in a note entitled "Top Tax Outperformers for Upside Call Buying." 

e think the potential passage of tax reform could provide 5 per cent near-term upside to the S&P 500. However, the potential upside could be significantly higher for those high-tax stocks poised to outperform in a more tax-friendly regime,” he wrote. Such a rally would add to the 15.6 per cent rise in the S&P 500 index of US stocks, for example that has taken place this year. With the US stock market having chalked up almost a decade of gains – it has fuelled speculation on whether such a prolonged rally is sustainable, particularly with the US central bank inching away from its ultra-loose stance of recent times.

Republicans in the Senate have started talks to pass changes to the tax code. The Trump administration wants to cut corporate taxes from 35 per cent to 20 per cent; there are also moves to double estate tax exemptions. One group of Senators, including Ron Johnson (R, Wis.) and Steve Daines (R, Mont.), wants deeper tax cuts for so-called pass-through businesses such as partnerships and S corporations that pay taxes on individual rather than corporate tax returns. Both said they want to prevent large corporations from deducting state and local taxes, freeing up money to drive down rates for pass-through firms (source: Wall Street Journal). Another group, including Bob Corker (R, Tenn.), Jeff Flake (R, Ariz.) and James Lankford (R, Okla.), worry about an added $1.4 trillion to budget deficits. The WSJ and other media note that another group of Senators, such as Susan Collins (R, Maine) and John McCain (R, Ariz.), could pose resistance over a variety of provisions, including plans to repeal the Affordable Care Act’s health-insurance mandate as part of the tax bill. 

Earlier in November, the House of Representatives voted to double exemption thresholds for estate tax from the current position where a 40 per cent levy affects estates worth over $5.49 million for single persons and $10.98 million for couples. The House also wants to repeal the tax; by contrast, a measure in the Senate would double thresholds but any changes would be temporary and end in 2026. An issue is how to reconcile the Senate and House bills. In the Senate bill plans, it will cut most households’ individual taxes through 2025 and cut the corporate tax rate to 20 per cent permanently. Some households, particularly upper-middle-class wage-earners in high-tax states, would pay more than they do now because they could no longer deduct state and local taxes.