Photographer: Michael Nagle/Bloomberg

These Are the Signs That Stocks Are Starting to Turn Really Bullish on Tax Reform

It’s starting to look like equity investors are confident that U.S. President Donald Trump and the Republican Congress will succeed in their tax overhaul efforts.

The KBW Bank Index is on track for its best day since 2007 and the S&P 500 Financials Index is at its highest level since October of that year, all on hopes the enactment of pro-growth fiscal policies will stoke U.S. growth -- and save financial institutions from paying billions in taxes.

Meanwhile, high-tax stocks are up more than 1 percent on the day, outperforming their lower-taxed peers by the most since 2008.

The Russell 2000 Index was up about 0.5 percent at around noon in New York and the S&P 500 Index was down. Why? Because the small caps in the Russell include many more domestically-oriented and higher-taxed firms poised to benefit more from lower corporate tax rates than their larger counterparts.

This also helps explain why U.S.-listed tech behemoths -- which have relatively low effective tax rates -- are in the throes of a major selloff. Companies with a high portion of retained overseas earnings (a group that includes many technology firms) are also in the red.

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