Wentz Weekly: First Quarter Earnings Kick Off This Week

Wentz Weekly Insights
First Quarter Earnings Kick Off This Week

The next catalyst for stocks will be the upcoming earnings season which kicks off this week with some of the largest banks the first to report. Investors will be looking for results and forward guidance and commentary on the reopening and recovery to continue to drive momentum in stocks. According to FactSet, analysts are expecting profits on S&P 500 companies to grow 24.5% compared to the same quarter a year ago, the same period the world economy shut down as a result of the pandemic. If this number holds, and if companies report earnings better than expected as they typically do, FactSet says growth could be at least 28% in the quarter, the highest growth in U.S. profits in over a decade. There will be no shortage of things for management teams to discuss on earnings calls. We expect many questions and comments on the reopening and future of working from home, vaccines, supply chain issues, and political issues such as minimum wage, taxes, and infrastructure.
U.S. Treasury Secretary Janet Yellen wrote an op-ed for the Wall Street Journal last week making her case on why the country needs higher corporate tax rates and a minimum tax on profits businesses make overseas, while calling for other governments to end the race to the bottom. The Biden Administration’s proposal to raise the corporate tax rate to 28% from 21% to fund part of infrastructure spending would put it near the top in the world. Yellen wrote in the piece that when the U.S. cuts corporate taxes other nations respond and try to undercut the U.S. In effort to fix the ‘race to the bottom’ Yellen urged nations to agree to a global minimum tax and proposes incentives to achieve this. More importantly for Yellen, the plan calls for a minimum 21% tax on U.S. company’s overseas profits. Yellen is pushing hard for the minimum tax, which in theory should stop the flow of business out of a country because the business knows it will be taxed no matter where they go.
The plan for higher corporate taxes and significant spending on infrastructure is still a long away, but the process to pass a bill was made easier last week. The Senate parliamentarian cleared the way for Democrats to use a process known as reconciliation for its infrastructure bill. This means Democrats could use the parliamentary procedure to bypass the 2/3 vote requirement and instead pass a bill with a simply majority – in the current scenario with no Republican support. Democrats have used reconciliation once this year already to pass the Covid related stimulus package last month. Provisions passed through reconciliation must relate to the budget, so any spending or tax changes are generally included in reconciliation. Republicans have criticized the $2.4 trillion infrastructure proposal so far, calling it too broad based and opposing the increase in corporate taxes. Some Democrats have also been vocal, opposing the proposal unless it included a repeal of the cap on state and local tax deductions, a feature that was part of the Trump tax reform. Significant change from the proposals is all but certain and recent reports suggest Democrats could compromise on the corporate tax rate and may even settle on something lower than the 28% in Biden’s proposal.
The global chip shortage is an ongoing issue and is now hitting one of the world’s largest companies. Apple, known to manage one of the most complex supply chains, proved it is not immune from the shortage. Production of the MacBook and iPad has been postponed due to a global shortage of key components, Nikkei reported last week. Because of the delay in production, Apple has pushed back orders for the devices from the first half of this year to the second half. Sources told Nikkei the shortage has yet to affect production for the iPhone but says supply for some of its components is very tight. These sources say the delays are a sign the global chip shortage is growing more severe. Apple did not comment but we would expect to hear more on the impact to the company in its earnings call on April 28.
The CEO of JPMorgan, Jamie Dimon, released his annual shareholder letter which said the economy is emerging from the pandemic and thanks to strong savings, significant stimulus including the $2.3 trillion infrastructure proposal, and the vaccine distribution could lead to a Goldilocks movement that could last into 2023. He went on to say the worse outcomes were prevented thanks to the government’s rapid and rather large monetary and fiscal support. Regarding taxes, Dimon said the effort to create equality and higher labor force participation will lead to higher taxes and any change to the corporate tax rate should be reasonable and moderate to keep the U.S. competitive with other countries.

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