Will This Catalyst Soon Cause Bank Stocks to Soar?

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I spend most of my days studying banks and their stocks, but the thing I'm focused on right now has little to do with the fundamentals at the banks I follow most closely -- namely, Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), and Wells Fargo (NYSE: WFC).

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What I'm watching instead is the likelihood that corporate tax reform will make it through Congress. If it does, it seems fair to think that bank stocks will respond positively to the news, as it will mean that more of these banks' earnings will be passed on to shareholders as opposed to the government.

If you rank the companies on the S&P 500 based on net income over the last four quarters, JPMorgan Chase, Bank of America, and Wells Fargo make up three out of the six most profitable companies on the large-cap index. In other words, if the corporate tax rate were in fact to drop from 35% to 20%, few companies would benefit more than banks.

So what's the chance of tax reform passing Congress? It depends on whom you ask.

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Grover Norquist, president of Americans for Tax Reform, a conservative organization that lobbies for lower taxes, says that the odds of passing are high. "I believe the Senate will pass a tax reform close enough to House bill to get it conferenced and signed into law by December 15," Norquist wrote on Twitter. "Odds: 90%....never know how many [Republican] Senators will be in hospital or funk on a given day."

Analysts at KBW agree that the odds of a tax bill passing are high, but not as high as Norquist thinks. One of the investment bank's lead analysts, Brian Gardner, "sees no unresolvable differences between the two bills and increases his view on the likelihood of a tax bill passing to around 70-75% from 60-65%," KBW wrote in a recent note to clients.

Whether these predictions prove accurate will come down to six Republican senators: Ron Johnson, Lisa Murkowski, Susan Collins, Jeff Flake, Bob Corker, and John McCain.

  • Ron Johnson wants the Senate's tax bill to reduce the tax rate for pass-through entities to the same level as corporations.
  • Lisa Murkowski and Susan Collins are primarily concerned with the bill's provision that repeals the individual mandate, which fines taxpayers who don't have health insurance.
  • Jeff Flake and Bob Corker are both fiscal hawks, concerned about the impact of the bill on the national debt.
  • John McCain has expressed reservations in the recent past about the truncated legislative process that Republicans employed in their effort earlier this year to repeal the Affordable Care Act, though he has expressed satisfaction with the way that the tax bill has been approached.

For anyone trying to get a handle on the future direction of bank stocks -- especially big banks like JPMorgan Chase, Bank of America, and Wells Fargo, which earn more money than all but a few other companies -- you'll want to watch pronouncements from these senators closely over the next couple weeks.

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John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.