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Morning Notes — Outlook


April 23, 2021

The impact of Biden’s proposed infrastructure spending plan is also net-negative for equities.  There will be some quantifiable benefit from physical infrastructure spending (maybe worth $1-$3 to 2022 S&P 500 EPS) but the impact of the proposed corporate tax hike to 28% would be an estimated SPX EPS headwind of ~$9 and a headwind of ~$5 if increased to only 25%.  The best-case scenario then would produce a 2022 SPX EPS headwind of $2 and a worst-case scenario headwind of ~$8.

Here now: The negative impact of higher tax rates falls outside the market’s 6-9 month investment window.  It’s important to keep in mind, but not immediately actionable.  The potential for higher bond yields resulting from increased fiscal spending does fall inside the window.

Bond yields: Ten year bond yields are still in consolidation mode with a ‘best case’ downside objective near ~1.45%.  The consolidation should continue until yields cross up and through ~1.65%, at which point we’d expect a release to higher levels with a ~1.90% near-term (late Q2) objective.  The June 16 FOMC policy decision is a potential catalyst to consider.

Cyclical/value: Our pro-cyclical/value tilt is primarily based on a recovery in the manufacturing cycle.  And today’s reading of April flash manufacturing PMI at 60.6 is the highest on record.  


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