Here’s the catalyst that could shift the market debate from selling the news to buying the dip


Two things are clear this earnings season.

The first is that first-quarter earnings have been outstanding. According to a Credit Suisse analysis done of 85% of the S&P 500’s companies, 86% beat expectations — with the financial sector clobbering them by 34%, and the rest of the market beating them by 19%. Earnings per share are projected to grow 47% on 10% revenue growth.

The second is that investors aren’t impressed. A Bank of America analysis done on Monday, so missing this last week of results, found companies that beat on both sales and EPS have outperformed the S&P 500 by just 16 basis points the next day, well below the historical average of 151 basis points.

Louis Navellier, the founder and chief investment officer of Navellier & Associates, said the Biden administration’s proposal to hike corporate taxes is what is hanging over the market.

“Within the debate over the market’s near-term outlook, the Goldilocks catalyst will be influenced by how future corporate taxes are structured. It is likely that after all the super PACs [political action committees] weigh in, the new corporate income-tax rate will likely be around 25%,” he said. “I’m looking for the narrative to quickly shift from ‘selling the news’ to ‘buying the dip’ as the tax debate takes on more clarity,” he writes.

The S&P 500
SPX,
+0.82%

could reach 4,600 by the end of the year, as Credit Suisse is targeting, if corporate taxes are negotiated to a lower level, said Navellier.

That view has some support from what President Joe Biden himself said. Speaking in Louisiana on Thursday to promote his infrastructure bill, Biden out loud suggested 25% as a number he would accept.

He prefaced his comment by noting the Obama administration had suggested cutting corporate tax rates that were then 35% — but not to 21%, where Congress set them under the Trump administration. Biden said it was important that the largest companies don’t pay zero, and added, “And — and reducing the — the tax cut to between 25 and 28, it’s a couple hundred billion dollars. We can pay for these things,” said Biden, according to a transcript released by the White House.

Biden’s current plan calls for the corporate tax rate to be increased to 28% from 21%.

All eyes on payrolls

Expectations are for a strong April jobs report, with economists polled by The Wall Street Journal and Dow Jones Newswires expecting one million nonfarm jobs created, and for the unemployment rate to decline to 5.8% from 6%.

“Over the last couple of weeks one question we have fielded a number of times is what we make of the possibility of seeing something close to a 2 million gain,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets, who is forecasting a 1.1 million gain. “We’ll say this, given how quickly the economic backdrop is seemingly evolving now, it cannot be outright discounted. Make no mistake, we are absolutely not trying to shade our call. Instead we think this question provides an opportunity for perspective. Whether a much firmer than expected gain happens or not, the clawing back of those folks sitting on the sidelines seems poised to continue in earnest over the coming months.”

The Federal Reserve’s financial stability report warned that asset prices may be vulnerable to significant declines — a similar warning to one the central bank made in November.

An optimistic financial outlook may lift Peloton Interactive
PTON,
+1.40%
,
which said a recall of its treadmill would cost the company about $165 million in revenue in its fiscal fourth quarter. Cybersecurity firm Cloudflare
NET,
-12.59%

reported stronger-than-forecast revenue.

Teladoc Health
TDOC,
-3.24%

may see pressure, after retailing giant Walmart
WMT,
+0.71%

agreed to buy MeMD, a telehealth provider.

Citi
C,
+1.45%

is considering launching crypto services, the Financial Times reported.

Ahead of the release of the payrolls report, U.S. stock futures
ES00,
+0.26%

NQ00,
+0.33%

edged higher, and the yield on the 10-year Treasury
TMUBMUSD10Y,
1.581%

was 1.57%.

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