NEW YORK (Reuters) - Investors are increasingly pricing in the effect of a corporate tax cut into the shares of U.S. companies, leaving the market primed for a steep sell-off if the Republican-controlled Congress fails to pass one of President Donald Trump's top priorities.
The benchmark S&P 500 <.spx> is up nearly 6 percent from its August lows as the Trump administration has rolled out its tax reform proposal, which would cut corporate taxes to 20 percent from the current 35 percent and allow companies to bring back some of the $2.6 trillion in cash currently held offshore at reduced rates.Bank of America Merrill Lynch said that a positive boost from taxes "had been priced out of stocks" in July but "has been making a solid comeback." Yet there are signs that the Trump administration has little room for error as it gets ready to introduce its tax legislation next week. The House of Representatives narrowly passed a budget measure on Thursday necessary for a vote on a tax bill, with Republicans from such high-tax states as New York and New Jersey among the opponents out of concerns that a bill would eliminate the deduction of state and local taxes.Trump must also stem potential revolts over a proposal to scale back the level of tax-deferred contributions to 401(k) retirement savings plans, which many middle-class Americans rely on for their retirement. "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 20 percent decline that signifies the start of a bear market. A collapse in the tax measure would likely send the S&P 500 down 5 percent or more, Goldman Sachs said in an Oct. 20 note. "Tax reform will determine the direction of the S&P 500's next 100 points," the report said. Over the last 30 days, roughly 75 companies - ranging from delivery service United Parcel Service Inc