- It was a rangebound session, with the major US equity bourses posting very modest losses as investors took a breather.
- Further evidence of the strong US labour market recovery on Tuesday was supportive, some investors seemed keen to take profits.
It was a broadly rangebound session for US equity markets, with the major bourses posting very modest losses as investors took a breather and some risk off the table after Monday’s big rally to record levels. Still, the S&P 500 (which finished 0.1% lower) was able to hit fresh intra-day all-time highs in the first half of the session in the mid-4080s. The Dow dropped 0.3%, the Nasdaq 100 just over 0.1% and the Russell 2000 just over 0.2%. The CBOE Volatility Index rose a modest 0.21 to just over 18.0. In terms of the GICS sectors, there was a very slightly defensive bias, with utilities (+0.5%) and consumer staples (+0.3%) amongst the outperformers and information technology (-0.4%) the underperformer.
Driving the day
While further evidence of the strength of the US labour market’s recovery released on Tuesday (JOLTS job opening rose to a two year in February) was supportive for equities, some investors seemed to have been keen to lock in some profits after the recent run higher. Some market commentators also attributed nerves ahead of the coming earning seasons as a reason why some market participants may have been keen to take profits; the upcoming earnings season is expected to show S&P 500 profit growth of 24.2% YoY, according to Refintiv data. Much of that growth reflects base effects, with Q1 2020 a bad quarter for profits amid the imposition of the first Covid-19 lockdown. However, it’s not all base effect; recall that S&P 500 profits were up over 10% YoY in Q4 2020 (i.e. well above pre-pandemic levels).
In terms of other notable stories, the IMF’s latest World Economic Outlook forecasts were bullish, particularly on the prospect for growth in the US economy in 2021. Much of this of course reflects the impact of the two massive fiscal stimulus packages already passed in the US this year. But the IMF’s growth expectations of 6.4% for the US in 2021 (revised higher from their 5.1% forecast back in January) also reflect hopes for a rapid post-vaccine rollout recovery and that the pandemic will in essence be brought under control.
Elsewhere, and another reason for equity investors to be cautious, was the news flow regarding corporate taxation; momentum appears to be building towards an OECD/G20 agreement on a global minimum corporate tax rate. The US, which is looking to increase the corporation tax rate domestically and is keen not to give away too much of competitive advantage, is keenly pushing for an agreement and major European countries (France and Germany) appear to be on board.
In a survey released by Canadian bank RBC, analysts said “tax generally is a major focus, with 93% saying it’s likely or very likely Biden will get something significant done on corporate taxes, along with 75% who expect significant action on individual taxes and 59% who expect significant action on capital gains taxes”. Other desks were throwing around numbers as to how much S&P 500 EPS would be hit under various corporation tax hike scenarios, with one call for EPS to fall 8% in the scenario where the US raises its corporation tax to 28% from 21% doing the rounds.
Looking ahead, the main focus of Wednesday’s session will be the release of the minutes of the FOMC’s March meeting, which comes ahead of Fed Chair Jerome Powell’s remarks at the IMF panel on Thursday. Another factor to keep an eye on is the Covid-19 infection rate in the US, which continues to gradually rise; US health officials have been sounding the alarm that this could be the start of a third wave of infections. Nevertheless, the Governor of California announced on Tuesday that so long as vaccine supply is sufficient and hospitalisation rates remain stable and low, nearly all Covid-19 restrictions on businesses are likely to have been removed by 15 June.
Share
