Equity markets across the globe advanced in April and were led by large cap and growth names. Monetary and fiscal policy accommodations and the continued escalation of vaccination distribution efforts fueled gains on the economic data front, exemplified by first quarter U.S. GDP growth of 6.4%. An increasingly clarified path toward normality and a strong start to earnings season bolsters our guardedly optimistic posture toward risk assets, restrained by somewhat elevated valuations, pandemic hotspots, and tax policy considerations.
Brief Market Recap
The 6.4% growth in the first quarter U.S. GDP was particularly noteworthy as it provides a very direct link to the economic impact of consumers, who spent at a rapid clip in the period. Having booked three consecutive quarters of robust growth, the U.S. economy is now, remarkably, within earshot of its pre-pandemic peak level. Recent GDP growth elsewhere around the world is a bit more mixed with solid gains in China offset by weaker results in the Eurozone and Japan.
Investors anticipated robust earnings results from several large technology companies, which drove equity prices higher within the sector. Those expectations broadly came to fruition, with 94% of technology companies beating earnings estimates and the sector reporting 40% year-over-year earnings growth. International developed and emerging market equities generated positive returns in April but modestly trailed the U.S. as many foreign countries continue to face challenges with virus containment and vaccine distribution.
Tax Policy Considerations
Released in April, the American Families Plan proposal would include $1 trillion of spending and $800 billion of tax cuts over a 10-year period. However, the plan would be largely funded by tax increases towards high income taxpayers. Below is a list of tax proposals from that plan. For a more in-depth review please visit our website to view Biden Administration Tax Proposals: What’s in it? article.
- Top Individual Income Tax Rate – raise from 37 percent to 39.6 percent, thus restoring the top rate that was in place prior to the Tax Cuts and Jobs Act (TCJA); the income range that would apply for the top rate is not known at this time, though an anonymous White House official cited $452,700 for single filers and $509,300 for joint filers.
- Long-Term Capital Gains & Qualified Dividends – raise from 20 percent to 39.6 percent for “households making over $1 million”; it is unclear whether the cited $1 million threshold relates to taxable ordinary income or investment income.
- Step-Up in Cost Basis at Death – repeal the current step-up in cost basis for inherited assets with gains exceeding $1 million (or $2 million for couples); certain protections would be created for family-owned businesses and farms where the heirs will continue to operate those businesses; this change will not impact the home sale gain exclusion of $250,000 for single filers or $500,000 for couples.
- 3.8 Percent Medicare Tax on Net Investment Income (NII) – expand the scope to cover all unearned income.
- Carried Interest – tax carried interest at ordinary income rates; per the White House’s fact sheet, “permanently eliminating carried interest is an important structural change necessary to ensure we have a tax code that treats all workers fairly”.
- Section 1031 Like-Kind Exchanges – repeal tax deferment on such exchanges for gains greater than $500,000.
- Additional IRS Funding – provide $80 billion over 10 years for additional IRS enforcement of tax evasion, which the administration believes could net more than $700 billion of tax revenue over 10 years.
In our view, near-term capital market prospects remain tethered to accommodative and ample supply of stimulus and meaningful gains achieved on the vaccination front. These conditions should hasten the pace of reopening and forge a more distinct path to a sustained economic recovery. Moreover, the improving economic data and strong earnings reporting season heighten our conviction that the near-term prospects appear to be, on balance, favorable for risk assets. However, we readily acknowledge that there remain a handful of considerations that may temper investors’ enthusiasm. Somewhat elevated risk asset valuations, resurgent pockets of infection, widely divergent vaccination efforts globally, the potential for onerous tax policy and increasing geopolitical risk require investors’ attention.
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