Corp Tax Increases, Fed Funds/GDP, Tech Earnings

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Corp Tax Increases, Fed Funds/GDP, Tech Earnings

Three Data topics today:

Topic #1: US corporate taxes and midterm elections through the lens of PredictIt, an online small-money wagering market we use as a rough proxy for market sentiment.

First up, PredictIt has a new contract titled “What will be the corporate tax rate for 2022?” The current rate is 21 percent, down from 35 percent thanks to the 2017 Tax Cuts and Jobs Act. President Biden has proposed raising the corporate rate to 28 percent. This contract only launched a few days ago and there’s not much money on the line yet, but here are the odds as of this afternoon (Sunday):

  • Odds that corporate taxes will not change: 17 percent
  • Odds of a 21.1 – 24.5 percent tax rate: 10 percent
  • Odds of a 24.6 – 27.9 percent tax rate: 68 percent
  • Odds of rates being 28 percent or higher: 7 percent

Second, we want to expand on last week’s discussion regarding midterm elections because the PredictIt contract titled “Which party will win the House in the 2022 election?” has started to move. As the 90-day chart below shows, Republicans have been favored to win back the House for some time. But… In the last 3 weeks their odds have gone from 60 percent to 67 percent. (We would note that PredictIt has a fairly constant level of noisy, partisan oriented wagering so we really only pay attention when there are large shifts in odds over a short period of time, like now.)

Takeaway: as we mentioned last week, President Biden needs to get to (and hold) a 60 percent Gallup approval rating before history says the Democrats have a shot at holding the House. The latest poll (April 1 – 21) shows him at 57 percent, still below the average of 61 for the first quarter of newly elected Presidents back to World War II. Given the shock of the Pandemic Recession, we suspect the state of the US economy in 2022 will determine his (and Democrats’) popularity going into midterms. A modest increase to corporate tax rates won’t likely hurt businesses’ hiring and investment plans, and the PredictIt odds favor some compromise below the 28 percent level.

Topic #2: Fed Funds Futures and Q1 GDP nowcasting estimates, since there’s a Fed meeting/Chair press conference on Wednesday and Advance Q1 GDP comes out Thursday:

First, Fed Funds Futures stubbornly cling to the idea that there is some chance the US central bank will have to break its pledge and increase rates in 2021. The December contract odds from the CME FedWatch tool (link below):

  • 88 percent odds the Fed stands pat in 2021, up from 86 percent last week
  • 12 percent odds the Fed increases rates in 2021, down from 14 percent last week.
  • Worth noting: 2-year Treasury yields have gone nowhere since July 2020, rangebound between 0.11 and 0.19 percent, which basically discounts one rate increase over the next 12-18 months.

Second, the New York and Atlanta Feds’ GDP models are showing hotter growth than Wall Street economists’ 6.5 percent estimate for Q1 US economic growth. We tend to favor the Atlanta model; here’s its progression over the last 4 months:

Takeaway: Chair Powell will certainly know Thursday’s Q1 GDP number when he hosts his usual post-FOMC press conference on Wednesday afternoon; if it really is as strong as the regional Fed models say, look for him to be very upbeat on the state of the US economy.

#3: Between Monday and Thursday of this week the 6 largest market cap companies in the US, making up 23 percent of the S&P 500, will report earnings. Tesla is Monday, Microsoft and Google go Tuesday, Apple and Facebook are Wednesday, and Amazon is Thursday.

A few comments on each:

Tesla: the strange thing here is that analysts are looking for a flat Q1 2021 versus Q4 2020, at $0.79/share now versus an actual $0.80/share last quarter. If there’s one super-cap Tech company that has to beat this quarter, it’s Tesla. You don’t pay big valuations for companies with no sequential growth. With Elon Musk set to host Saturday Night Live in 2 weeks’ time, one might assume he’s got a big beat lined up. Except this is Elon, so maybe not…

Microsoft: expected to print the smallest year-on-year quarterly revenue and EPS growth of any US Big Tech company at $1.78/share, 27 percent higher than last year, on sales growth of “just” 17 percent. Still, MSFT isn’t in regulators’ crosshairs the way other companies are, and its business creates annuity-like cash flow streams. Score one for being boring but highly profitable.

Apple: analysts here haven’t changed their calendar Q1 EPS by even 1 cent in the last 60 days, expecting $0.98/share (53 percent higher than a year ago) on revenue growth of 32 percent. That’s what happens when you own a global market like Apple owns smartphones – you get really reliable earnings. But what’s the company’s post-pandemic gameplan for growth? Right now, the Street is only looking for 4 percent sales growth in AAPL’s 2022FY, which kicks off in July.

Google: the only Big Tech company where the Street has been cutting numbers over the last 60 days, but analysts are still expecting 59 percent EPS growth (to $15.74/share) on 25 percent revenue growth. GOOG broke out to a new all-time high on Friday, which says that perhaps the Street is too low. As we often say, earnings leverage in an upturn is hard to predict…

Amazon: analysts expect AMZN to post the best Big Tech year-on-year EPS comps (ex TSLA), at $9.49/share (89 percent growth) on 38 percent revenue growth. AMZN’s stock has gone the longest of any name we’re talking about today without making a new high; its last one was in September 2020. That’s why we’ll be watching AMZN’s earnings especially attentively: either something’s wrong, or AMZN has some catchup coming.

Facebook: there’s a really wide spread in EPS expectations here – the mean is $2.36 (+38 percent over last year), but the range in analysts’ estimates goes from $1.93/share (+13 pct) to $2.80 (+64 pct). Revenue estimates aren’t so wide (range of +22 pct to +41 pct vs. last year), so, as with other names here, analysts are clearly struggling with just how much earnings leverage Facebook actually has. The stock made a fresh high earlier this month, so the market thinks it knows…

Final thought: Big Tech has come back nicely in the last few weeks, but it’s been hard to know if that was a “safety trade” rotation (as it was last year) or if the market was sniffing out some big earnings beats. This week we’ll find out which one it was.

Sources:

CME FedWatch tool: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html