Stock futures settle down in anticipation of a big week of earnings

People walk past the New York Stock Exchange in Lower Manhattan on October 5, 2020 in New York City.

Angela Weiss | AFP | Getty Images

Futures contracts, pegged to major US stock indices, remained stable at the start of the overnight session on Sunday evening as investors braced for one of the busiest weeks of the first quarter’s earnings season.

Investors face a busy week between a Federal Reserve meeting, President Joe Biden’s American Families Plan debut, more inflation data, and ongoing corporate earnings reports.

Stock markets came under pressure last week after multiple outlets reported that Biden will seek to raise capital gains tax for wealthy Americans to help fund the second part of his Build Back Better agenda. The president is expected to detail the $ 1.8 trillion plan, including spending proposals for worker education and family support, at a joint session of Congress on Wednesday evening.

The proposal would increase the capital gains rate for those earning $ 1 million or more from the current 20% to 39.6%, according to Bloomberg News.

News that the White House could seek to hike capital gains tax on the country’s rich pushed the S&P 500 down nearly 1% on Thursday as multiple outlets reported the proposed hike.

Although the broad stock index more than made up for those losses with a rebound of 1.1% on Friday, it ended the week down 0.13% and posted a four-week winning streak. The Dow and Nasdaq fell 0.5% and 0.3% respectively last week.

Dennis DeBusschere, ISI strategist at Evercore, told CNBC on Sunday that fears of a peak in economic growth and negative global Covid-19 news may have ended the S&P 500’s weekly winning streak, but that creeping pessimism didn’t last for too long should stop.

“A rapidly improving labor market, which will continue as the US normalizes, contradicts top GDP fears and suggests that the output gap is fast closing and inflation, bond yields and cyclical asset prices are under pressure will put, “he wrote.

He advised investors to avoid pivoting on the market tone and buy stocks that are sensitive to the health of the US economy and are known as cyclical factors.

“It pays to be one step ahead of this change in sentiment (less bad news) and get back to cyclicals and defensive fades,” added DeBusschere. “If we learned anything from the data last week, it is that 1) Europe is showing no signs that global activity is being adversely affected, and 2) pent-up consumer demand is proving resilient to negative COVID headlines.”

The Fed, which meets on Tuesday and Wednesday, is expected to defend its policy of keeping inflation running hot while reassuring markets that the price hike is only temporary. Chairman Jerome Powell will hold a press conference Wednesday afternoon to discuss the Federal Open Market Committee’s decision.

The coming week is an important week for corporate earnings. About a third of the S&P 500 will provide investors with information on how their business has performed in the three months ended March 31. Some of the largest companies in the world are expected to publish results this week such as Apple, Microsoft, Alphabet and Amazon.

As the global economy gradually reopens, companies like Boeing, Ford, and Caterpillar are expected to notice the cost pressures they face from rising material and transportation prices.

Companies so far have largely managed to beat Wall Street’s predictions for earnings season. With 25% of the companies in the S&P 500 reporting results for the first quarter, 84% reported a positive earnings surprise per share and 77% beat sales estimates.

If 84% is the final percentage, that will be the mark for the highest percentage of the S&P 500 companies reporting a positive EPS surprise since FactSet started tracking that metric in 2008.

Nonetheless, the strong first quarter results were received largely lukewarm by investors. Strategists say that already high ratings and near record highs for the S&P 500 and Dow have kept traders’ excitement in check. However, the indices are within 1% of their all-time high.

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