Traders on the floor of the New York Stock Exchange.
The last week of April will be a busy one for the markets with a Federal Reserve meeting and a barrage of earnings news.
Inflation and taxes will continue to be hot topics in the markets.
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 Better Back Down agenda and will include new spending proposals designed to help families. The President addresses a joint session of Congress on Wednesday evening.
With around a third of the S&P 500 reports including big tech names like Apple, Microsoft, Alphabet, and Amazon, this is a big week of earnings.
As many have already done, companies like Boeing, Ford, Caterpillar, and McDonald’s are likely to describe the cost pressures they face from rising material and transportation costs and supply chain disruptions.
At the same time, the Fed is expected to defend its policy of allowing inflation to run hot while reassuring markets that it sees the rise in prices as temporary. The central bank meets on Tuesday and Wednesday.
The central bank takes over the main stage
“I think the Fed doesn’t want to be a feature next week, but the Fed is being pushed into the background due to inflation concerns,” said Diane Swonk, chief economist at Grant Thornton.
The central bank is not expected to take any political action, but Fed Chairman Jerome Powell’s press conference after Wednesday’s meeting is being closely watched.
So far, the flood of profit news has been positive: 86% of companies reported winning hits. According to Refinitiv, net income is projected to grow around 33.9% in the first quarter based on estimates and actual reports. Sales are 9.9% higher.
There is important inflation data on Friday when the Fed’s preferred inflation meter is reported.
The personal consumption expenditure report is expected to show core inflation to rise 1.8%, still below the Fed’s 2% target. Further data releases concern first-quarter gross domestic product on Thursday, which, according to the Dow Jones, is expected to have grown by 6.5%.
“I don’t think the Fed has any urgency to change monetary policy right now,” said Ian Lyngen, head of US interest rate strategy at BMO. “The Fed has to acknowledge that the data is improving. We had a strong first quarter.”
“The Fed needs to acknowledge this, but at the same time maintain its highly accommodative policy, so it needs to acknowledge the fact that the simple policy is justified,” he said.
Lyngen said the Fed is likely to point out ongoing concerns about the pandemic around the world as a potential risk to economic recovery.
Powell is also expected to reiterate that the Fed will let inflation rise above its 2% target for a period of time before raising rates to give the economy more time to heal. “It’s going to be a challenge for the Fed,” said Swonk.
The base effects for the next few months cause inflation to rise sharply on the basis of a comparison with a weak period last year. The consumer price index for April could be above 3%, compared to 2.6% last month, added Swonk.
“The Fed is trying to get a lot more people on the dance floor before shouting ‘last call’,” she said. “Really, what Powell has been saying since day one is if we take care of people on the fringes and get them back into work, the rest will take care of themselves.”
Stocks were slightly lower over the past week and government bond yields remained at lower levels. The 10-year return, moving against price, was 1.55% on Friday.
The S&P 500 fell 0.1% to end the week at 4,180 while the Nasdaq Composite fell nearly 0.3% to 14,016. The Dow was just under 0.5% at 34,043.
Outlook for tax hikes
Stocks were hit hard on Thursday when Biden suggested a capital gains tax rate of 39.6% for people who earn more than $ 1 million a year, according to news.
Combined with the 3.8% net investment tax, the new levy would more than double the long-term capital gains rate of 20% or the richest Americans.
Strategists said 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 assess the risk that both corporate and capital gains taxes will rise significantly,” said Lyngen.
So far, companies haven’t contributed much to the proposed increase in corporate taxes from 21% to 28%, but they have talked about other costs.
David Bianco, Chief Investment Strategist for America at DWS, expects larger companies to deal better with supply chain constraints than smaller ones. Big Tech is also likely to outperform automakers who have already announced production shutdowns during the semiconductor shortage, he said.
“Next week is tech week. I think we’re going to get on our knees and just be in awe of their business models and their ability to grow on a gigantic scale,” said Bianco.
He said he was not in favor of Wall Street popular trading in cyclicals and out of growth. He still prefers growth.
“We are really overweight because we are concerned about rising interest rates,” said Bianco. “I’m not optimistic that I expect the market to grow that much from here.”
“We have continued to grow and looked deeper into bond replacements, utilities, food staples and real estate,” he said, adding that he is underweight industrials, energy and materials. “Energy is doomed. It will be nationalized through regulation. I like industrial companies, they are well-run companies, but I think the expectations of infrastructure spending for traditional infrastructures are too high.”
He also said industrials are good companies, but stocks are overvalued.
Bianco said he likes big stores, but smaller retailers face huge challenges that affected them even before Covid. He also finds small biotech companies attractive.
“I like health care stocks. These ratings are reasonable. People have been paranoid about politicians beating them since 1992. They make it and lately they are delivering,” he said.
Calendar for the week ahead
Merits: Tesla, Canadian National Railways, Canon, Check Point Software, Otis Worldwide, Vale, Ameriprise, NXP Semiconductor, Albertsons, Royal Phillips
8:30 a.m. consumer goods
The FOMC begins a 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 a.m. S & P / Case-Shiller
9:00 a.m. FHFA real estate prices
10:00 am Consumer Confidence
10:00 a.m. vacant apartments
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 a.m. leading indicators
2 p.m. Fed statement
2:30 p.m. 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-Stahl, Cirrus Logic, Texas Roadhouse, Cabot Oil, PG & E, Royal Dutch Shell, Church & Dwight, Carlyle Group, Southern Co.
8:30 am Initial jobless claims
8:30 a.m. Real GDP Q1
10:00 a.m. Pending home sales
Merits: 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 a.m. Employment Cost Index Q1
9:45 am Chicago PMI
10:00 am consumer mood
Merits: Berkshire Hathaway