Traders on the trading floor of the New York Stock Exchange.
The last week of April will be a busy market for the markets with a Federal Reserve meeting and a deluge of earnings news.
Hot topics in markets will remain inflation and taxes.
President Joe Biden is expected to detail his “American Families Plan” and the tax increases to be paid 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 to help families. The president will address a joint session of congress on Wednesday evening.
It’s been a huge week for revenue with about a third of the S&P 500 reporting, including Big Tech names, such as Apple, Microsoft, Alphabet and Amazon.
As many have already done, companies like Boeing, Ford, Caterpillar and McDonald’s are likely to describe the cost pressures they face as a result of rising material and transportation costs and supply chain disruptions.
At the same time, the Fed is expected to defend its policy of keeping inflation high, while assuring the markets that it sees the price increase as only temporary. The central bank will meet on Tuesday and Wednesday.
The central bank takes the main stage
“I don’t think the Fed wants to play a role next week, but the Fed will be forced out of the background over inflation concerns,” said Diane Swonk, chief economist at Grant Thornton.
The central bank is not expected to take policy action, but Fed Chairman Jerome Powell’s press conference following Wednesday’s meeting will be closely watched.
So far, the barrage of earnings news has been positive, with 86% of companies reporting earnings reports. According to Refinitiv, corporate earnings are expected to increase by approximately 33.9% in the first quarter, based on estimates and current reports. Revenues are about 9.9% higher.
There will be important inflation data on Friday when the Fed’s preferred inflation meter is reported.
The Personal Consumption Expenditure report is expected to show a 1.8% rise in core inflation, still below the Fed’s 2% target. Other data includes first-quarter gross domestic product on Thursday, which is expected to grow 6.5%, according to Dow Jones.
“I don’t think the Fed has any urgency to change monetary policy at this point,” said Ian Lyngen, head of US interest rate strategy at MET. “The Fed must recognize that the data is improving. We had a strong first quarter.”
“The Fed needs to recognize that, but at the same time they maintain an extremely accommodative policy, so they will have to note that the easy policy is justified,” he said.
Lyngen said the Fed is likely to point to ongoing global pandemic concerns as a potential risk to the economic recovery.
Powell is also expected to explain that the Fed will allow inflation to rise above its 2% target for a while before hitting interest rates so that the economy has more time to heal. “It will be a challenge for the Fed,” said Swonk.
Due to the base effects for the coming months, inflation appears to have risen sharply on comparison with a weak period last year. The consumer price index for April could be above 3% from 2.6% last month, Swonk added.
“The Fed is trying to get a lot more people to hit the dance floor before the ‘last call’ shouts,” she said. “Basically what Powell has been saying since day one is that if we take care of the marginalized people and put them back to work, the rest will take care of themselves.”
Shares were slightly lower over the past week and government bond yields remained at a lower level. The 10-year interest rate, which is moving against the price, was 1.55% on Friday.
The S&P 500 was down 0.1% to end the week at 4,180, while Nasdaq Composite fell nearly 0.3% to 14,016. The Dow was just shy of 0.5% on 34,043.
Outlook for tax increases
The stock was hit hard on Thursday when a news report said Biden is expected to propose a capital gains tax rate of 39.6% for people making more than $ 1 million a year.
Combined with the 3.8% net investment income tax, the new levy would mean more than double the long-term gains on more than 20% of the richest Americans.
According to strategists, Biden is expected to propose raising the income tax rate for those who earn more than $ 400,000.
“I think a lot of people are starting to estimate the risk that there will be a significant increase in both corporate and capital gains taxes,” said Lyngen.
So far, companies have not commented much on the proposed increase in corporate tax from 21% to 28%, but they have discussed other costs.
David Bianco, lead investment strategist for the Americas at DWS, said he expects larger companies to handle supply chain constraints better than smaller ones. Big Tech is also likely to outperform carmakers during the semiconductor shortage, which have already announced production shutdowns, he said.
“Next week is tech week. I think we’ll get on our knees and just be amazed at their business models and their ability to grow at a massive scale,” said Bianco.
He said he is not in favor of Wall Street’s popular cyclical and growth trade. He still advocates growth.
“We are overweight equities as we are concerned about rising interest rates,” said Bianco. “I’m not optimistic because I expect the market to rise so strongly from here.”
“We stuck to the growth and went deeper into bond substitutes, utilities, commodities and real estate,” he said, adding that he is underweight industrials, energy and materials. “Energy is doomed. It is being nationalized through regulation. I really like industrialists, they are well-run companies, but I think the expectations for infrastructure spending for classic infrastructure are too high.”
He also said industry and services are good companies, but stocks are overvalued.
Bianco said he likes big box stores, but smaller retailers face big challenges that have already impacted Covid. He also finds small biotech companies attractive.
“I like health care stocks. Those valuations are reasonable. People have been paranoid since 1992 about politicians kidding them. They’re getting through it and lately they are showing results,” he said.
Week ahead calendar
Merits: Tesla, Canadian National Railway, Canon, Check Point Software, Otis Worldwide, Vale, Ameriprise, NXP Semiconductor, Albertsons, Royal Phillips
8.30 am Durable goods
FOMC begins two-day meeting
Merits: 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 home prices
10.00 am Consumer confidence
10:00 am Housing vacancies
Merits: 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 am Preliminary economic indicators
2:00. Fed statement
2.30 pm. Briefing from Fed Chairman Jerome Powell
Merits: 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 am First unemployment claims
8.30 a.m. Real GDP Q1
10:00 am Awaiting the sale of houses
Income: 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 am Personal income and expenses
8.30 am Labor cost index Q1
9:45 am Chicago PMI
10:00 am Consumer feeling
Income: Berkshire Hathaway