Wall Street Weekahead: Soaring market oriented towards infrastructure plans and upcoming returns

© Reuters. A US flag flies in front of the Federal Reserve Bank of New York in New York

By Lewis Krauskopf

NEW YORK (Reuters) – U.S. President Joe Biden’s massive infrastructure proposal and the upcoming corporate earnings season could offer investors fresh insights into the sustainability of a rally that has brought stocks to all-time highs.

The value rose to 4,000 for the first time on Thursday, closing 1.18% at 4,019.87. As a result, the benchmark index rose from its lows in March 2020 to almost 80%. The rally was driven by unprecedented US economic stimulus and expectations that COVID-19 vaccinations will fuel an economic recovery.

Evidence of strengthening economic and corporate growth could support investor confidence after a quarter of solid stock gains, but also a worrying spike in bond yields and market volatility, including the wild ride in GameStop (NYSE 🙂 stocks and the collapse of highly indebted stocks family office Archegos Capital.

Investors will also get a glimpse of how companies have performed a year after the pandemic broke out if corporate earnings start in earnest in mid-April.

“We have seen volatility over the past few months,” said Matt Hanna, portfolio manager at Summit Global Investments. “There is always a doubt that the carpet may be pulled out, but now that we hit 4,000, I am sure that confidence will be renewed in the opinion of many traders that this bull cycle is not over.”

Recent history suggests stocks could keep rolling this month, with the S&P 500 having its highest average April gain in any month over the last 20, according to Ryan Detrick, chief market strategist at LPL Financial (NASDAQ 🙂 Years ago.

A short-term market focus is likely to be whether Congress will pass the infrastructure plan that Biden officially unveiled this week. It includes $ 2 trillion in spending but also higher corporate taxes that investors fear could undermine profits.

Coupled with Biden’s recently passed coronavirus aid package worth $ 1.9 trillion, the federal government’s infrastructure initiative would give the federal government a bigger role in the US economy than it has for generations. The original plan includes spending on everything from roads and bridges to broadband and elderly care, and it may introduce another spending package in April.

Jefferies (NYSE 🙂 economists estimate that Biden’s infrastructure plan could add a total of 0.5 to 1 percentage points to their estimate of 5.2% growth in U.S. gross domestic product in 2022.

Given that spending is expected to rise over time, the impact on the market could be softened compared to the recent aid package that sent $ 1,400 checks direct to Americans.

More infrastructure spending, however, could fuel the shares of industrial and materials companies that have been among the groups that have benefited from bets on an economic recovery in recent months.

“From a market perspective, this cyclical / value area that has worked should have another section in the second quarter as we see things like this infrastructure package potentially adding more fuel,” said Anthony Saglimbene, global market strategist at Ameriprise.

Biden also plans to raise the U.S. corporate tax rate to 28% from the 21% levy set in the Trump administration’s 2017 tax bill, which was previously a support for stocks. According to UBS equity strategists, the S&P 500 earnings could see a 7.4% decrease from the proposed tax plan, including the higher corporate rate.

Investors have largely tackled the tax plan as it is in line with expectations and may not take effect until next year. However, a new tax hike accompanying Biden’s next proposed spending plan could pose a risk, said Walter Todd, chief investment officer at Greenwood Capital.

“The market took the early news very well …” said Todd. “I’m worried that the next round might be more tax-expansive than people are expecting.”

Corporate earnings are seriously due from mid-April, and according to Refinitiv IBES, the S&P 500 earnings are expected to increase 24.2% year over year for the first quarter.

However, rising earnings expectations could have a disadvantage, said Randy Frederick, vice president of trading and derivatives at Charles Schwab (NYSE :).

“In my opinion, if the expectation level has been raised as high as it has been before, it could lead to some disappointments that could potentially result in the market stalling,” said Frederick.

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