U.S. Capital Gains Tax Proposal Challenges Stocks, Big Tech to Report Earnings
Last Week Review
Global equities fell 0.1% last week. Economic data was generally strong as vaccinations continue to support the global growth outlook. The vaccine rollout is helping buoy depressed sentiment from Europe and emerging market regions’ battle with COVID-19. Accommodative global monetary policy remains a key support for equities. Last Thursday, equities fell on news of a potential capital gains tax hike in the U.S., though they rebounded some the next day. Meanwhile, equities have so far been relatively unmoved by strong earnings as investors likely already priced positive results into valuations. The 10-year Treasury yield fell 2 basis points to 1.56%, bringing it to 18 basis points below its one-year high reached about a month ago (1.74%).
U.S. Capital Gains Tax Hike Proposal Details Emerge
U.S. equity markets closed down just under 1% last Thursday following news that U.S. President Joe Biden’s administration wants to raise the capital gains tax for wealthy investors to 39.6% (43.4% including an existing surtax) from 20%. The capital gains tax increase, along with other individual tax hikes, would be used to fund phase two of Biden’s infrastructure proposal. While the market reacted sharply to the tax details, equity headwinds from past capital gains tax hikes have been limited and temporary and the infrastructure plan is highly fluid.
ECB Stays Firm
The European Central Bank made no policy changes, as expected. Vaccine progress supports a positive economic growth trajectory, but in the face of ongoing risks the central bank believes it’s premature to discuss dialing back asset purchases. The Bank of Canada said it will reduce its government debt purchases starting this week. The decision followed the announcement of fresh stimulus from Canada’s government. The outlook for Canada’s economy is strong on the back of pandemic resiliency and accelerating vaccinations. The bank should hold its low policy rate firm until the labor market fully recovers. As for economic indicators, the flash Purchasing Managers’ Index (PMI) showed ongoing economic expansion in the U.S. and improvement in Europe.
U.S. Earnings Beating Estimates
About 85% of S&P 500 Index companies who have reported first-quarter earnings (24% have reported) beat analysts’ estimates. Aggregate earnings growth is expected to be about 30% year-over-year. Despite notably strong earnings and fundamentals, high investor expectations demonstrated by above-average equity valuations have led to a somewhat muted response to the earnings.
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Vaccines Push Against Virus Concerns
Last week, India posted a pandemic record for daily new virus cases. Emerging market regions and Europe continue to battle the virus, allowing for some investor concerns on economic lockdowns and the emergence of vaccine-resistant strains. However, vaccinations continue to underpin less severe virus-related market headwinds. Investors will continue to monitor developments.
Apple, Alphabet and Amazon to Report Earnings
Alphabet (GOOG) and Microsoft (MSFT) will report on Tuesday, Apple (AAPL) will report on Wednesday and Amazon (AMZN) will report on Thursday. Historically-elevated valuations and rising government bond yields have put these stocks under some pressure this year, although Amazon and Apple are the only two that have underperformed the S&P 500 this year.
Biden Infrastructure Plan, Fed and Bank of Japan Meetings
The Biden administration may formally introduce the details of the second phase of the proposed infrastructure agenda. Also, the Federal Reserve will meet. No major policy changes are expected, but investors will tune into Chairman Jerome Powell’s post-meeting press conference on Wednesday to glean how the Fed is evaluating the economic recovery and what that means for future policy. The Bank of Japan is expected to keep policy unchanged on Tuesday. Finally, investors will keep an eye on U.S. and Europe inflation data that will be released late this week.
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