Morning Notes — Headwinds and Bond Yields

SPX: Over 50% of S&P companies have now reported Q1 results with improved metrics driving the 2022 consensus SPX EPS estimate toward ~$215.  At current levels, this implies a forward multiple of ~19.5x.  Equity multiples don’t usually rerate in the presence of strong global growth, but levels north of ~20x probably requires an incremental tailwind.  Higher tax rates and QE tapering are not tailwinds. While QE tapering seems inevitable, the SPX should be able to manage 10-year yields as high as ~1.90% before rates become a major headwind.  Biden’s proposed tax hikes are a clear headwind with the corporate rate alone taking an estimated $9 off 2022 SPX EPS estimates.  This week’s rollout of Biden’s American Families Plan included, among other things, the elimination of the step-up in basis upon death for capital gains of $1M or more ($2M for a married couple).  This would have even larger negative implications for equity markets. At a minimum, equities will price an uncertainty discount until there’s more clarity.

Bond yields: The April US Jobs Report will be released next Friday with another payroll add close to last month’s +916,000 likely driving 10-year yields through near-term resistance at ~1.65%.  Expect short-term bearish price momentum to accelerate once yields get through to a ~1.79% near-term target.  The Fed speaking calendar will also begin picking up next week with investors paying closer attention to messaging after Friday’s Jobs Report.