Traders on the floor of the New York Stock Exchange.
The final week of April will be busy for markets with a Federal Reserve meeting and a deluge of earnings news.
The hot topics in the markets will continue to be inflation and taxes.
President Joe Biden is expected to detail his “American Household Plan” and the tax increases to pay for it, including a much higher capital gains tax for the wealthy. The plan is the second part of its Build Back Better agenda and will include new spending proposals aimed at helping families. The president addresses a joint session of Congress on Wednesday evening.
It’s a huge week for earnings with about a third of the S&P 500 reports, including Big Tech names like Apple, Microsoft, Alphabet, and Amazon.
As many have already done, companies like Boeing, Ford, Caterpillar and McDonald’s are likely to detail the cost pressures they face from rising materials and transportation costs and supply chain disruptions.
At the same time, the Fed should defend its policy of letting inflation heat up, while ensuring markets see prices pick up only temporarily. The central bank meets on Tuesday and Wednesday.
The central bank is the protagonist
“I think the Fed would like it not to be a feature next week, but the Fed will be forced out of context due to inflation concerns,” said Diane Swonk, Grant Thornton’s chief economist.
The central bank is not expected to make any political moves, but Fed Chairman Jerome Powell’s press briefing after Wednesday’s meeting will be followed closely.
So far, the earnings news barrage has been positive, with 86% of companies reporting earnings jokes. According to Refinitiv, corporate profits are expected to increase approximately 33.9% for the first quarter, based on actual estimates and reports. Revenues are approximately 9.9% higher.
There is important inflation data on Friday when the Fed’s preferred inflation indicator is brought back.
The personal consumption spending report is expected to show a 1.8% increase in core inflation, still below the Fed’s 2% target. Other data released Thursday includes first-quarter gross domestic product, which is expected to grow 6.5%, according to Dow Jones.
“I think the Fed has no urgency to change monetary policy at this point,” said Ian Lyngen, head of US rate strategy at BMO. “The Fed has to recognize that the data is improving. We had a great first quarter.”
“The Fed has to acknowledge this, but at the same time it is maintaining an extremely accommodative policy, so they will have to take note that easy policy is justified,” he said.
Lyngen said the Fed is likely to point to continued pandemic concerns globally as a potential risk to economic recovery.
Powell should also explain once again that the Fed will let inflation rise above its 2% target for a period of time before raising rates so the economy can have more time to heal. “It will be a challenge for the Fed,” Swonk said.
The base effects for the next few months will make it appear that inflation has jumped sharply due to the comparison with a weak period last year. The consumer price index for April could be higher than 3%, up from 2.6% last month, Swonk added.
“The Fed is trying to get a lot more people out on the dance floor before calling ‘last call’,” he said. “In reality what Powell has been saying from day one is that if we take care of the people on the fringes and bring them back into the workforce, the rest will take care of themselves.”
Equities were slightly lower last week and Treasury yields held lower levels. The 10-year yield, which moves against the price, was 1.55% on Friday.
The S&P 500 fell 0.1%, ending the week at 4,180, while the Nasdaq Composite fell nearly 0.3% to 14,016. The Dow was out just under 0.5% at 34,043.
Prospects for tax increases
The shares were hit hard on Thursday after a news report said Biden is expected to propose a capital gains tax rate of 39.6% for people earning more than $ 1 million a year.
Combined with the 3.8% net investment income tax, the new levy would double the rate of long-term capital gains by 20% or wealthier Americans.
Strategists said Biden should propose raising the income tax rate for those earning more than $ 400,000.
“I think a lot of people are starting to assess the risk that there will be a significant increase in capital gains and corporation taxes,” Lyngen said.
So far, companies haven’t provided much in the way of comments on the proposed 21% to 28% corporate tax hike, but they have talked about other costs.
David Bianco, chief investment strategist for the Americas at DWS, said he expects larger companies to do better at managing supply chain constraints than smaller ones. Big Tech is also likely to fare better during the semiconductor shortage than automakers, who have already announced production stoppages, he said.
“Next week is tech week. I think we’ll get down on our knees and just be in awe of their business models and their ability to grow to a colossal scale,” Bianco said.
He said he is not in favor of Wall Street’s popular trade in cyclicals and growth. It still promotes growth.
“We are overweight on equities because we are concerned about rising interest rates,” Bianco said. “I’m not optimistic as I expect the market to go up so much from here.”
“We stayed true to growth and delved into bond replacements, utilities, consumer staples, real estate,” he said, adding that he is underweight to the industrial, energy and materials sectors. “Energy is doomed. It is nationalized through regulation. I like industrialists, they are well-run companies, but I think the infrastructure spending expectations for classic infrastructure are too high.”
He also said that industrialists are good deals, but the stocks have become overvalued.
Bianco said he likes department stores, but smaller retailers are facing big challenges that were already impacting them before Covid. He also finds small biotech companies attractive.
“I like health actions. These assessments are reasonable. People are paranoid about the politicians who have been beating them since 1992. They succeed and have been getting results lately,” he said.
Calendar of the week before
Earnings: Tesla, Canadian National Railway, Canon, Check Point Software, Otis Worldwide, Vale, Ameriprise, NXP Semiconductor, Albertsons, Royal Phillips
8:30 Durable goods
FOMC begins the two day meeting
Earnings: Microsoft, Alphabet, Visa, Amgen, Advanced Micro Devices, 3M, General Electric, Eli Lilly, Hasbro, United Parcel Service, BP, Novartis, JetBlue, Pultegroup, Archer Daniels Midland, Waste Management, Starbucks, Texas Instrument, Chubb, Mondelez, FireEye, Corning, Raytheon
9:00 am S & P / Case-Shiller
9:00 am FHFA house prices
10:00 Consumer confidence
10:00 Availability of accommodation
Earnings: Apple, Boeing, Facebook, Qualcomm, Ford, MGM Resorts, Humana, Norfolk Southern, General Dynamics, Boston Scientific, eBay, Samsung Electronics, GlaxoSmithKline, Yum Brands, SiriusXM, Aflac, Cheesecake Factory, Community Health System, CIT Group, Entergy, CME Group, Hess, Ryder System
8:30 Anticipated economic indicators
14:00 Fed statement
14:30 Briefing by Fed President Jerome Powell
Earnings: Amazon, Caterpillar, McDonald’s, Twitter, Bristol-Myers Squibb, Comcast, Merck, Northrop Grumman, Airbus, Kraft Heinz, Intercontinental Exchange, Mastercard, Gilead Sciences, US Steel, Cirrus Logic, Texas Roadhouse, Cabot Oil, PG&E, Royal Dutch Shell , Church & Dwight, Carlyle Group, Southern Co.
8:30 Initial jobless claims
8:30 Real GDP Q1
10:00 pending sale of houses
Earnings: ExxonMobil, Chevron, Colgate-Palmolive, AstraZeneca, Clorox, Barclays, AbbVie, BNP Paribas, Weyerhaeuser, Illinois Tool Works, CBOE Global Markets, Lazard, Newell Brands, Aon, LyondellBasell, Pitney Bowes, Phillips 66, Charter Communications
8:30 Income and personal expenses
8:30 am Index of the cost of employment Q1
9:45 am Chicago PMI
10:00 Consumer sentiment
Earnings: Berkshire Hathaway