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- JPMorgan says the market is underpricing the potential for stock market gains in the event that Republicans successfully overhaul the tax code.
- The firm recommends buying bullish single-stock call options on a handful of companies closely linked with tax-reform progress.
JPMorgan is one of those firms, and it thinks investors are asleep at the switch, ignoring crucial upside in equities in the event that Republicans pass corporate tax cuts. The bank estimates that the S&P 500 has the potential to climb 5% from current levels.
“The most significant near-term upside catalyst for equities is still ahead – passage of the US tax bill,” Shawn Quigg, an equity derivatives strategist at JPMorgan, wrote in a client note. “Our analysis indicates the market is significantly underestimating the probability of tax reform passage.”
But since so much uncertainty is still lingering around the tax plan, Quigg says traders have to pick their spots carefully. This means eschewing broader stock index bets and focusing on single stocks closely linked to tax-reform progress.
The table below shows JPMorgan’s highest-conviction single-stock tax bets. To identify them, the firm screened its proprietary index of tax-linked companies, zeroing in on those with robust options trading volume and low implied volatility.
The Senate’s version of the bill cleared the Senate Finance Committee before Congress’ Thanksgiving recess and was rolled out Tuesday for debate and amendments on the Senate floor.
The Tax Cuts and Jobs Act (TCJA) passed the committee on a party-line vote of 12 to 11. But despite the Budget Committee moving the bill forward, Business Insider’s Bob Bryan points out that the TCJA is not assured to pass on the broader Senate floor.
Still, if you remain optimistic, JPMorgan’s suggested strategy is one to consider. After all, with so much uncertainty surrounding tax reform, those willing to risk positioning for upside could wind up reaping huge profits.