So much depends upon a tax reform plan from President Trump. But he gave a signal Wednesday suggesting it might not come until late in the year.
Following the November elections, optimistic investors propelled stock indexes, including the Dow Jones industrial average, up to previously unexplored heights, as they eagerly anticipated Trump's promised corporate tax cuts to unleash profits for businesses struggling with the high current tax rate of about 35%.
The tentative deadline for the tax plan originally set by its point man, Treasury Secretary Steven Mnuchin, was this August.
But a pre-recorded interview with Trump, which aired Wednesday morning on Fox, suggests that tax reforms won't come for a while yet, because Trump will not set a deadline on for passing his promised health care reform bill. "By putting a deadline, they say, 'Oh, Trump didn't make it, he didn't make it,'" Trump told Fox. "I don't wanna put deadlines. Healthcare is gonna happen at some point. Now, if it doesn't happen fast enough, I'm gonna start taxes. Tax reform and tax cuts are better if I do healthcare first."
The president had already signaled that he does not want to touch tax reforms until he passes some alternative to the Affordable Care Act, also known as Obamacare. A previous House vote on repealing that program and replacing it with the American Health Care Act was canceled in late March. That caused investors to worry about whether the Republican Party, which now controls both houses of Congress and the White House, could overcome its internal divisions.
The bottom line: Investors are now likely to endure a few extra months of anxiety, according to Evercore ISI analyst Terry Haines, who made that assessment in a research note. The note was published late Tuesday: It circulated Wednesday as the VIX, or the "fear index," a measure of market volatility, reached its highest point since the election, breaching 16 at one point during the day.
Trump's comments suggest a tax reform plan won't come about until November or December at the earliest, said Haines, who added that the reform effort might potentially drag out until just before the November 2018 midterm elections. That thought echoed one stated by Morgan Stanley in a Monday note to clients, which determined that a tax reform late in 2018 is one of the most probable outcomes.
Haines, meanwhile, maintains that there's a 70% to 75% chance those reforms will materialize by March 2018. While the Republican-controlled Congress will be busy with health care reforms and the 2018 budget resolution this year, they also need to show voters ahead of the midterm elections that they can deliver on their promise to boost the economy, he said.
That means investors who have been loading up on stocks based on the expected impact of Trump's tax reforms, creating what has been called the "Trump bump" rally in the stock market, will have longer to worry about whether they overbought. And corporations will also be stuck on hold for the time being. Without a concrete tax plan in place, companies are likely to hesitate to apportion more funds right now to research and development, or to shareholder dividends.
The S&P 500 is flat relative to its close the day the health care vote was canceled. It's now up 8.4% since the elections. That's added roughly $1.9 trillion to the aggregated market cap of the companies on the S&P 500 index.