Trump tax failure could spark sell-off
Investors are increasingly pricing in the effect of a corporate tax cut into the shares of US companies, leaving the market primed for a steep sell-off if Congress fails to pass one of US President Donald Trump's top priorities.
The benchmark S&P 500 is up nearly 6pc from its August lows as the Trump administration has rolled out its tax reform proposal, which would cut corporate taxes to 20pc from the current 35pc and allow companies to bring back some of the $2.6tn (€2.2tn) in cash currently held offshore at reduced rates.
Bank of America Merrill Lynch said a positive boost from taxes "had been priced out of stocks" in July but "has been making a solid comeback".
"The nature of the rally over the last two months has been tax-cut led. If we don't get a cut then the market is going down" several percentage points, said Edward Perkin, chief equity investment officer at Eaton Vance.
Such a decline would be the first significant sell-off of the year, he said, but would not likely be near the 20pc decline that signifies the start of a bear market. A collapse in the tax measure would likely send the S&P 500 down 5pc or more, Goldman Sachs said. "Tax reform will determine the direction of the S&P 500's next 100 points," it said.