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traderREUTERS/Sue Ogrocki

  • The stock market is fresh off a bizarre day of trading that saw 2017’s biggest winners stumble, while the laggards helped offset those losses with large gains of their own.
  • This internal tug-of-war highlights how many areas of the stock market are reacting to the possibility of a GOP tax bill passage.

The stock market doesn’t look like its normal self, and the GOP tax bill is to blame.

Equities in the US were thrown for a complete loop on Wednesday as red-hot technology stocks took a beating. Bearing the brunt of the selling was the elite FANG group — consisting of Facebook, Apple, Netflix and Google — which had roughly $60 billion in market value erased, the most in five years.

On the other side of the S&P 500‘s ledger were telecom companies, which surged 2.7% to lead all sectors — a reversal of their futility so far in 2017, having dropped 12% year-to-date. Meanwhile, an index of bank stocks turned in its best day since 2007.

At the root of this market upheaval is speculation around the passage of the GOP’s tax bill, which faces a crucial 48 hours, with the Senate headed for a lengthy debate, followed by a final vote on Friday. As anticipation mounts, investors are scrambling to position for a successful passage.

That’s not to say this has been a negative for the market as a whole. The S&P 500 finished down just 0.04% on Wednesday amid all the sector-level turmoil.

The lack of broad movement highlights one of the stock market’s most interesting characteristics in 2017: its ability to rotate returns into different industries to stay afloat, rather than sell off all at once. It’s a dynamic that played out at least once in the past few months, as well as around this time last year, all in the name of preserving the 8 1/2-year bull market.

Here’s a rundown of how prospects of tax reform are shaping investor decisions for specific sectors:

  • Tech — While the selling in this space may come as a surprise to some, it makes sense when you consider that the sector has the third-lowest tax rate out of any industry, according to data compiled by S&P Global. That means companies in the group have less to gain from a corporate tax cut, and investors are recognizing that by pulling money and allocating it elsewhere.
  • Highly-taxed companies — A Goldman Sachs index of high-tax companies surged 1.4% on Wednesday as traders bet that they’ll be helped most by the GOP’s proposed corporate tax cut. Further, the group outperformed a similarly constructed index of lower-taxed corporations by the most since 2008, according to Bloomberg data.
  • Small-caps — The Russell 2000 index of small-cap stocks rose 0.4% on Wednesday as investors buy exposure in more domestic-focused companies expected to benefit most from the GOP tax plan.
  • Banks — As stated above, banks had an outstanding day, boosted by optimism that the GOP plan will improve US growth and allow firms to pay lower taxes.

The S&P 500 rallied in pre-market trading on Thursday. Perhaps most interestingly, the more tech-heavy Nasdaq 100 is up 0.3% after plummeting as much as 2.2% on Wednesday.

While the slight rebound is probably being driven more by dip-buying than any shift in sentiment around the GOP tax plan, it’s still in the best interest of all investors to keep an eye on the latest developments. Because if Wednesday showed anything, it’s that the market can be turned on its head at a moment’s notice.

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