"Taxes and inflation will be key themes for markets in the week ahead"

" \n The final week of April is going to be a busy one for markets with a Federal Reserve meeting and a deluge of earnings news. \n \n\n \n Hot topics in markets will continue to be inflation and taxes. \n \n\n \n President Joe Biden is expected to detail his \u201cAmerican Families Plan\u201d and the tax increases to pay for it, including\u00a0 a much higher capital gains tax for the wealthy. \u00a0The plan is the second part of his Build Back Better agenda and will include new spending proposals aimed at helping families. The president addresses a joint session of Congress Wednesday evening. \n \n\n \n It\u2019s a huge week for earnings with about a third of the S&P 500 reporting, including Big Tech names, such as Apple, Microsoft , Alphabet and Amazon . \n \n\n \n As many have already done, firms like Boeing , Ford, Caterpillar and McDonald\u2019s , are likely to detail cost pressures they are facing f rom rising materials and transportation costs and supply chain disruptions. \n \n\n \n At the same time, the Fed is expected to defend its policy of letting inflation run hot, while assuring markets it sees the pick-up in prices as only temporary. The central bank meets on Tuesday and Wednesday. \n \n\n \n The central bank takes the main stage \n \n\n \n \u201cI think the Fed would like not to be a feature next week, but the Fed will be forced from the background because of concerns about inflation,\u201d said Diane Swonk, chief economist at Grant Thornton. \n \n\n \n The central bank is not expected to make any policy moves, but Fed Chairman Jerome Powell\u2019s press briefing following the meeting Wednesday will be closely watched. \n \n\n \n So far, the barrage of earnings news has been positive, with 86% of companies reporting earnings beats. Corporate profits are expected to be up about 33.9% for the first quarter, based on estimates and actual reports, according to Refinitiv. Revenues are about 9.9% higher. \n \n\n \n There is important inflation data Friday when the Fed\u2019s preferred inflation gauge is reported. \n \n\n \n The personal consumption expenditure report is expected to show a 1.8% rise in core inflation, still below the Fed\u2019s target of 2%. Other data releases include the first-quarter gross domestic product on Thursday, which is expected to have grown by 6.5%, according to Dow Jones. \n \n\n \n \u201cI think the Fed has no urgency to shift monetary policy at this point,\u201d said Ian Lyngen, head of U.S. rates strategy at BMO. \u201cThe Fed needs to acknowledge that the data is improving. We had a strong first quarter.\u201d \n \n\n \n \u201cThe Fed needs to acknowledge that but at the same time they\u2019re keeping extremely accommodative policy in place, so they\u2019ll have to make a note to the fact that the easy policy is warranted,\u201d he said. \n \n\n \n Lyngen said the Fed will likely point to continued concerns about the pandemic globally as a potential risk to the economic recovery. \n \n\n \n Powell is also expected to once more explain that the Fed will let inflation rise above its 2% target for a period of time before it raises rates so that the economy can have more time to heal. \u201cIt\u2019s going to be a challenge for the Fed,\u201d said Swonk. \n \n\n \n The base effects for the next several months will make inflation appear to have jumped sharply because of the comparison to a weak period last year. The consumer price index for April could be above 3%, compared to 2.6% last month, Swonk added. \n \n\n \n \u201cThe Fed is trying to let a lot more people get out onto the dance floor before it calls \u2018last call,\u2019\u201d she said. \u201cReally what Powell has been saying since day one is if we take care of people on the margins and bring them back into the labor force, the rest will take care of itself.\u201d \n \n\n \n Stocks were slightly lower in the past week, and Treasury yields held at lower levels. The 10-year yield, which moves opposite price, was at 1.55% Friday. \n \n\n \n \n \n\n \n \n \n\n \n The S&P 500 was down 0.1%, ending the week at 4,180, while Nasdaq Composite was down nearly 0.3% at 14,016. The Dow was off just shy of 0.5% at 34,043. \n \n\n \n Tax hike prospects \n \n\n \n Stocks were hit hard on Thursday when after a news report said that Biden is expected to propose a capital gains tax rate of 39.6% for people earning more than $1 million a year. \n \n\n \n Combined with the 3.8% net investment income tax, the new levy would more than double the long term capital gains rate of 20% or the richest Americans. \n \n\n \n Strategists said Biden is expected to propose raising the income tax rate for those earning more than $400,000. \n \n\n \n \n \n\n \n \n \n\n \n \u201cI think a lot of people are starting to price in the risk there going to be a significant increase in both corporate and capital gains taxes,\u201d said Lyngen. \n \n\n \n So far, companies have not provided much in the way of commentary on the proposed hike in corporate taxes to 28% from 21% but they have been talking about other costs. \n \n\n \n David Bianco, chief investment strategist for the Americas at DWS, said he expects larger companies will do better dealing with supply chain constraints than smaller ones. Big Tech is also likely to fare better during the semiconductor shortage than auto makers, which have already announced production shutdowns, he said. \n \n\n \n \u201cNext week is tech week. I think we\u2019re going to get down on our knees and just be in awe of their business models and their ability to grow at a behemoth scale,\u201d Bianco said. \n \n\n \n He said he\u2019s not in favor of Wall Street\u2019s popular trade into cyclicals and out of growth. He still favors growth. \n \n\n \n \u201cWe\u2019re overweight equities really because we\u2019re concerned about rising interest rates,\u201d Bianco said. \u201cI\u2019m not bullish in that I expect the market to rise that much from here.\u201d \n \n\n \n \u201cWe stuck with growth and dug deeper into bond substitutes, utilities, staples, real estate,\u201d he said, adding he is underweight industrials, energy and materials. \u201cEnergy is doomed. It\u2019s being nationalized via regulation. I do like industrials, they are well-run companies, but I do think infrastructure spending expectations for classic infrastructure are too high.\u201d \n \n\n \n He also said industrials are good businesses, but the stocks have become overvalued. \n \n\n \n Bianco said he likes big box stores, but smaller retailers are facing big challenges that were already impacting them prior to Covid. He also finds small biotech firms attractive. \n \n\n \n \u201cI like healthcare stocks. Those valuations are reasonable. People have been paranoid about politicians beating on them since 1992. They manage through it and lately they\u2019ve been delivering,\u201d he said. \n "

"Taxes and inflation will be key themes for markets in the week ahead"

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