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Wall Street Week Ahead: High-flying market to take cues from infrastructure plans, upcoming earnings

Stock Markets Apr 03, 2021 01:30PM ET
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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 insight on the sustainability of a rally that has taken stocks to all-time highs.

The S&P 500 scaled 4,000 for the first time on Thursday and closed up 1.18% at 4,019.87, extending the benchmark index's gain to nearly 80% from lows in March 2020. The rally has been driven by unprecedented U.S. stimulus measures and expectations that widespread vaccinations against COVID-19 will spur an economic rebound.

Evidence of strengthening economic and corporate growth could support investor confidence after a quarter that saw solid stock gains but also a worrying surge in bond yields and pockets of market volatility, including the wild ride in GameStop (NYSE:GME) shares and the meltdown of highly leveraged family office Archegos Capital.

Investors also are set to get a snapshot of how companies are performing a year after the onset of the pandemic when corporate earnings kick off in earnest in mid-April.

"We've been seeing the volatility over the past few months," said Matt Hanna, portfolio manager at Summit Global Investments. "There's always a doubt that perhaps the rug can get pulled out, but now that we're hitting 4,000 I'm sure that renews confidence in a lot of traders’ minds that this bull cycle is not over.”

Recent history suggests stocks could keep rolling this month, with the S&P 500 tallying its highest average gain in April out of any month over the past 20 years, according to Ryan Detrick, chief market strategist at LPL Financial (NASDAQ:LPLA).

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

Coupled with Biden's recently enacted $1.9 trillion coronavirus relief package, the infrastructure initiative would give the federal government a bigger role in the U.S. economy than it has had in generations. The initial plan calls for spending on everything from roads and bridges to broadband and elderly care, and he may unveil another spending package in April.

Economists at Jefferies (NYSE:JEF) estimate Biden's infrastructure plan overall could add 0.5 to 1 percentage points to their estimate of 5.2% growth in U.S. gross domestic product in 2022.

With any spending set to come over time, the market impact could be blunted compared to the recent relief package that sent $1,400 checks directly to Americans, investors said.

But more infrastructure spending could fuel shares of companies in the industrials and materials sectors, which have already been among the groups benefiting in recent months from bets on an economic rebound.

"From a market perspective, that cyclical/value area that has been working should have another leg in the second quarter as we see things like this infrastructure package maybe add some 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 by the Trump administration's 2017 tax bill, which had previously been a support for stocks. S&P 500 earnings could take a 7.4% hit from the proposed tax plan, including the higher corporate rate, according to UBS equity strategists.

Investors have taken the tax plan largely in stride as it has come within expectations and may not take effect until next year, but any new tax increase that accompany Biden's next proposed spending plan could pose a risk, said Walter Todd, chief investment officer at Greenwood Capital.

"The market has digested the initial news very well...," Todd said. "My concern is potentially the next round may be more expansive on the tax front than people are expecting."

Corporate results are due in earnest starting in mid-April and overall S&P 500 first-quarter earnings are expected to jump 24.2% from a year ago, according to Refinitiv IBES.

But there could be a downside to increasing profit expectations, said Randy Frederick, vice president of trading and derivatives for Charles Schwab (NYSE:SCHW).

"When the expectations bar has been raised as much as it has, then I think that it sets up for some disappointments and that could cause the market to potentially stall out,” Frederick said.

Wall Street Week Ahead: High-flying market to take cues from infrastructure plans, upcoming earnings
 

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Comments (14)
Mourad Mourad
Mourad Mourad Apr 05, 2021 6:53PM ET
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holla
Tai Nguyen
Tai Nguyen Apr 05, 2021 8:45AM ET
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Autofll
President Xi Jinping
President Xi Jinping Apr 03, 2021 3:43PM ET
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Economy taking off! Dont miss it like the Downers below
Diddl One
Diddl One Apr 03, 2021 3:43PM ET
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True. Question is, taking off from what and going where? And who is missing out on what? Just because I am not overly enthusiastic does not mean I can't "cautiously" participate in the current uptrend. That's called trading. :-)
Danut Ciuc
Danut Ciuc Apr 03, 2021 3:18PM ET
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WDaniel Craig Anderson
Diddl One
Diddl One Apr 03, 2021 2:22PM ET
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Government bonds on the rise. 30% of the Corporate bonds on the verge to junk. Higher tax for big money. Despite this "economic boost", money flows out of the US. After Biden's "whateverthatwas" speech, $ got weaker. Nobody else in the world wants in on all the marvelous opportunities in the US. Other markets outperform US Indices. Buffet sits back and waits. (than again he always was a bad investor, right?) All perfect reasons to expect markets to be doing reanalysis well. :-)
Diddl One
Diddl One Apr 03, 2021 2:22PM ET
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someone editing my comment? I wrote reeeeaaaally. :-)
Alison Boxxer
Alison Boxxer Apr 03, 2021 7:36AM ET
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BOTH Goldman Sachs and Morgan Stanley predict OVER 8 percent GDP growth this year growth we have not seen in 100 years in this country the trickled down scam is being exposed as an absolute con this year under Biden 30 trillion went to the super rich while half this country is starving and in poverty now
perplexed76 .
perplexed76 . Apr 03, 2021 1:30AM ET
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absurd builds up
Eudon Hickey
Eudon Hickey Apr 02, 2021 11:44AM ET
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Lewis- how does it feel to lie everyday? You jnow the market does not take cues from the infrastructure plan
Amine Fourali
Amine Fourali Apr 02, 2021 11:44AM ET
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Worst than that he is not lying, he is incompetent...
Casador Del Oso
Casador Del Oso Apr 02, 2021 8:56AM ET
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The infrastructure relief plan contains tax hikes.
Notvery Goodathis
Peteymcletey Apr 02, 2021 8:38AM ET
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"Infrastructure"
 
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