Despite another strong week of corporate earnings announcements, U.S. equity markets took a pause from their year-to-date surge last week as market participants digested the announcement of President Biden’s proposal to increase the capital gains tax rate for high income households and monitored concerning global trends in Covid-19 cases. The major U.S. equity indices ended the week in the red but recouped most of their losses on Friday following robust economic data including indications of growing demand for the U.S. service sector and a 20% month-over-month increase in new home sales in March. The S&P 500 ended -0.1% lower for the week and the Dow Jones and Nasdaq Composite were down -0.4% and -0.3%, respectively.
Under President Biden’s new tax proposal, the capital gains tax rate for high income households generating over $1 million in annual income would be raised from 20% to 39.6%. Additionally, the top marginal income tax rate would also be raised to 39.6% from 37% currently, and a Medicare tax of 3.8% would bring the total tax rate to 43.4%. The proposed tax increases would be used to help pay for the President’s antipoverty and education spending proposal called the American Family Plan, which is expected to be unveiled in greater detail this week. Aside from some initial selling pressure following the announcement on Thursday, the stock market reaction has been muted as tax increases have been broadly anticipated and the proposal will next need to be approved by Congress where it may be subject to changes.
On the corporate earnings front, first quarter earnings announcements so far have been beating expectations at record rates. According to FactSet, with a quarter of S&P 500 constituents having reported so far, the index is on track for aggregate earnings growth of nearly 34% over the first quarter of 2020, compared to the consensus forecast of about 25% at the start of earnings season or just 15.8% at the start of the year. Companies have beaten earnings forecasts by 23.6% so far with the upward revisions providing a tailwind for stocks. However, there continues to be a lot of focus on supply chain constraints and rising input costs and the ability to pass on those increases to customers.
The growing traction of the vaccine rollout in the U.S. and the release of pent-up, stimulus-supported consumer demand has pushed 2021 earnings estimates higher with the annual earnings growth for the S&P 500 now forecast at 30%. To date, 43% of the U.S. population has received at least one dose of the vaccine, but global new case trends have caused concern as some countries, most notably India, have seen a large resurgence. The daily average of new cases in India over the last week has climbed to over 330k with less than 9% of the population having received at least one dose of a vaccine.
The week ahead will be a busy one for markets as the wave of earnings results rolls on with the largest members of the S&P 500 on the docket to report, including Apple, Amazon, Google, Facebook, and Microsoft. Additionally, the Federal Reserve will provide an update on Wednesday following its monthly meeting, though no notable changes to monetary policy are anticipated. The consensus expectations, if economic continues to demonstrate a robust recovery as in recent months, is that the Federal Reserve will begin to remove accommodation by tapering off bond purchases in the second half of this year. There is no shortage of economic news this week as well with the initial look at first quarter U.S. GDP growth, March consumption data, and updated consumer confidence readings on the calendar.
