A solid start to earnings season helped investors overlook inflation fears and challenges in China. After experiencing the first down quarter since the initial pandemic sell-off, U.S. stocks quickly rebounded and are once again posting new all-time highs. Growth led the way, with mega cap companies Microsoft, Alphabet and Tesla booking large returns. Bonds were flat overall, as the yield curve flattened.
Profit margins overall continue to expand despite supply chain issues, rising labor costs and higher commodity prices, suggesting companies have been able to successfully pass on pricing to consumers. With inflation risk capturing more and more headlines, the Fed announced it will begin tapering bond purchases this month. Expectations for the first interest rate hikes are split between mid-to-late 2022 and 2023. While the concepts of tapering and rate increases are garnering much attention, we note that the Fed will still be conducting a large amount of asset purchases for some time, and rates are expected to remain below 1% for at least the next year or two.
Corporate Tax Rates
A quiet but potentially powerful bullish factor this month was fading support for raising corporate tax rates as part of the proposed infrastructure stimulus package. Corporate rates are expected to increase from 21% to 26.5%. This would be a direct reduction in earnings available to shareholders. If this increase is not included in the final legislation, it could help fuel an end-of-year rally.