Treasury Secretary Steven Mnuchin said stocks will crash if Congress fails to pass a tax bill. He's also the fellow who has said that tax reform would be done by now.

There is "no question" the market rally has baked in the expectation of tax legislation, the former Goldman Sachs (GS - Get Report) executive said in an interview with Politico. He said he believes markets will rise if Republicans manage to pass a bill and warned things could go south if they fail.

"I think to the extent we get the tax deal done, the stock market will go up higher," he said. "But there's no question in my mind that if we don't get it done you're going to see a reversal of a significant amount of those gains."

Equity markets have gained in recent months amid investor optimism about having Republicans in control of the White House, Senate and House of Representatives. The S&P 500 has climbed more than 14% year-to-date, the Dow Jones Industrial Average has gained 17% and the Nasdaq has ascended 25%.

However, the S&P 500 generated positive returns in 15 of the 19 quarters leading up to the 2016 election that ushered Donald J. Trump into the White House. Market fundamentals, the global macroeconomic environment and earnings are strong, tax cuts or not. Wall Street bullishness on the prospects of a tax bill has diminished as Republicans have failed make good on their legislative agenda.

"That would not be the case [that markets will tank without a tax bill]," said Jack Ablin, chief investment officer at BMO Private Bank. "As recently as August investors had a zero percent chance of tax reform." Mnuchin said in February that tax reform would be done by August. So far, Trump has signed no major tax or health-care legislation.

In recent weeks optimism on tax reform appears to have returned to Wall Street as the GOP turned its focus to taxes and away from the ongoing push-and-pull over the Affordable Care Act.

White House officials and Congressional leaders spearheading tax efforts released a nine-page framework of their proposal in September, and work on the 2018 budget -- a necessary precursor for tax reform through the reconciliation process -- is progressing.

"At the end of August, it seems like the market started paying more attention, and maybe the perception is the administration might be getting a bit more focused and is becoming a little more serious," said Mike Thompson, managing director at S&P Global Market Intel, in an interview with TheStreet. "The market now, as they've gotten more details, and as there seems to be more dialogue, some of it positive, some of it not positive, it does seem like they're moving in a direction."

As of Tuesday, the price-to-earnings valuation for the S&P 500 was 18.8, or 14.4 times above the 17.4 forward P/E ratio on a quarterly closing basis for the eight quarters leading up to the presidential election, Thompson said in a note on Wednesday. Beginning with third-quarter expected earnings-per-share this quarter, valuation drops slightly to 18.2.

If P/E valuations stay where they are, the S&P 500 could jump to 2,716 if tax cuts quickly become a reality. If they drop slightly to a more modest 17.5, that produces an S&P 500 level of 2,555, slightly below where it is today, at roughly 2,563.

There isn't a lot of slack, but there is also plenty of room for markets to dip slightly without crashing.

"If that happens, people will run and buy. People are looking for something to drop stock prices so they can get in," Thompson said. "At the end of the day, this stuff is like chapters, but the book is the broader macroeconomic narrative."

To be sure, onlookers have been speculating a market correction could be on the horizon for quite some time, including President Trump himself -- before he took office. "It's all a big bubble," then-candidate Trump said in an August 2016 interview. He repeated the point at a September 2016 debate

Mnuchin in his Politico sit-down discussed the complications of making predictions and identifying risk. 

"It's never obvious what the risks are at the time. The risks always seem unobvious," he said. "I'm skeptical we can predict what the next problem is."

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Editors' pick: Originally published Oct. 18.