It was a choppy week for the S&P 500, with several intraday swings around 1%. Despite the noise, the index finished just a hair below its all-time high. Participants are digesting earnings, evaluating the virus, and weighing the potential for substantial changes in tax law. On balance, the narrative remains that reopening is underway, the economy is much improved from a year ago, the recent stimulus remains a catalyst for further improvement, and that companies are making the most of the changes from the pandemic. Concerns about taxes and a virus lingering longer than anticipated may be doing just enough to tamp down inflation worries that have grown in recent months.  

So far, companies have been blowing away their earnings estimates. 75% of companies have beaten their expectations so far. With about a quarter of the S&P 500 companies reporting, sales have surprised to the upside by nearly 6%, and earnings have surprised to the upside by almost 35%. Much of the good news at the company level has been priced in over the past few months, and we don't see a ton of movement in prices post-earnings. Only companies going out of their way to raise their outlook are really getting a boost. The bar for market-moving earnings reports is getting higher, but from a long-term perspective, it is great to see how well companies have handled such adversity. This lends confidence to the notion that great companies can make it through rough times.  

Developments on tax policy are also playing out alongside earnings. As part of the proposed infrastructure bill, corporate tax rates are likely to move higher. Beyond just a higher tax rate, companies with high foreign sales may be particularly exposed to proposed provisions that seek to capture a greater share of a company's offshore earnings in the form of taxes. Such changes could weigh on earnings growth by 5 to 8% next year. In addition, President Biden floated a proposal that would increase the capital gains tax rate for earners over a certain threshold. These proposals have intermittently caused market anxiety, but so far, the concern has been relatively minor. We expect that the proposals are likely to be negotiated down to a more digestible iteration through the legislative process. We're on guard for certain industries or companies that might be at particular risk under a new regime. At the same time, we are on the lookout for companies well-positioned for such an environment.  


Preston May, CBE®
Research Analyst


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