- Weekly global market focus
- President Biden on Wednesday is expected to outline American Families plan with capital gains tax hike
- CDC approves the resumption of J&J vaccinations
- Q1 earnings season hits peak
Weekly global market focus — The U.S. markets this week will focus on (1) the Tue/Wed FOMC meeting where the Fed is expected to reiterate its recent themes, (2) President Biden’s announcement on Wednesday of his American Families Plan, (3) the peak week for Q1 earnings with reports from 180 of the S&P 500 companies, (4) the Treasury’s sale of 2-year and 5-year T-note today and 7-year T-notes on Tuesday, (5) the pandemic statistics, and (6) a busy economic calendar with the highlight being Thursday’s Q1 GDP report (expected +6.9%).
In Europe, the focus is on pandemic infection levels and the improved vaccination pace. Friday’s Eurozone Q1 GDP is expected to show a decline of -0.8% q/q and -2.0% y/y.
In Asia, the BOJ on Tuesday is expected to announce an unchanged policy after its meeting. China’s PMI reports on Thursday night are expected at -0.2 to 51.7 for the manufacturing PMI and -0.4 to 55.9 for the non-manufacturing PMI.
President Biden on Wednesday is expected to outline American Families plan with capital gains tax hike — The U.S. stock market this week may trade on a cautious note going into President Biden’s joint address to Congress on Wednesday evening.
Mr. Biden in Wednesday’s address is expected to announce his American Families Plan, which involves a large amount of social spending on education, increased child credits, and a raft of other measures. The bill will be paid for with increased taxes on those earning over $400,000.
The stock market last Thursday took a hit of about -1% after Bloomberg reported that the Biden administration will propose raising the capital gains tax to 39.6% from 20% for taxpayers earning more than $1 million per year. The capital gains tax would be above 40% after adding in the existing Obamacare surtax on investment income and state taxes. Other tax hikes in the bill are expected to be an increase in tax brackets for people making over $400,000, higher estate taxes, restrictions on carried interest, and other measures.
The reported capital gains tax proposal was in line with President Biden’s campaign platform and wasn’t any big surprise. Nevertheless, the markets are worried that wealthy investors might start dumping their stocks later this year to beat the tax hike, assuming that it begins January 1, 2022. However, it is possible that the tax hike would be retroactive to the beginning of 2021, in which case selling stocks wouldn’t save any money on taxes. In any case, a higher tax on stock gains would make stocks somewhat less attractive as an investment and could compress P/E ratios.
DC approves the resumption of J&J vaccinations — The CDC last Friday cleared the way for vaccinations to resume for the Johnson & Johnson Covid vaccine. That was good news since the single-shot J&J vaccine is easier to administer and can be distributed to areas without the supercold freezers required by the Moderna and Pfizer vaccines.
The Covid infection level in the U.S. remains elevated but at least hasn’t started any big new wave. The 7-day average of new daily Covid infections rose to a 2-month high of 71,343 on April 13, but has since eased to 59,610 as of Saturday. The fact that the pandemic is not worsening suggests that vaccinations are having a large impact in preventing new infections.
According to the CDC’s Covid Data Tracker, 28.0% of the total U.S. population has now been fully vaccinated, and 41.8% have received at least one dose. The average number of daily U.S. vaccine doses fell to 2.82 million doses in the past week from the recent peak of 3.4 million, according to Bloomberg. The slower vaccine rate is due to reduced demand, not to restricted supply since excess supplies of the vaccines are starting to build up. In any case, the slower vaccine rate is bad news since it will take longer for the U.S. to reach herd immunity.
Globally, the pandemic is getting much worse in some countries like India, Brazil, and Japan. The 7-day average of new daily infections in India has now reached a world record of 327,840, according to Johns Hopkins. Japanese Prime Minister Suga last Friday declared a state of emergency for the prefectures of Tokyo, Osaka, Kyoto, and Hyogo, which together make up a quarter of Japan’s population, from this past Sunday to May 11 to try to dampen the infection rates.
Q1 earnings season hits peak — Q1 earnings season peaks this week with reports from 180 of the S&P 500 companies. Notable reports this week include Tesla today; Alphabet, Microsoft, UPS and PulteGroup on Tuesday; Apple and Facebook on Wednesday; Amazon, Twitter, Mastercard, and Caterpillar on Thursday; and Exxon on Friday.
The consensus is for S&P 500 earnings in Q1 to show a strong gain of +33.9% (+34.9% excluding energy), according to Refinitiv. Earnings so far have been stronger than expected. Of the 123 reporting SPX companies, 85.4% have beaten the consensus, which is much better than the long-term average of 65.3% and the 4-quarter average of 75.5%.
Looking ahead, the consensus is for even stronger S&P 500 earnings growth in Q2 of +57.1%, then easing to +21.3% in Q3 and +14.8% in Q4. On a calendar year basis, the consensus is for strong +29.3% earnings growth in 2021, overcoming the -12.2% decline seen in 2020.