[Good Morning Stock Market] US Stock Market Reflects Corporate Tax Increase Concerns... "Focus on Earnings Improvement Stocks"

Corporate Tax Increase, S&P 500 EPS Down 9% Next Year
"Focus on Stocks with Improved Earnings in Auto, Chemicals, Electronics, and Securities"

[Asia Economy Reporter Minji Lee] Despite favorable economic indicators, the U.S. stock market closed lower amid concerns over a corporate tax hike. The decline was particularly notable among technology stocks, with the Nasdaq index falling 2%, while the S&P 500 and Dow Jones indices dropped 0.55% and 0.01%, respectively. West Texas Intermediate (WTI) crude oil prices surged about 6% following news of the Suez Canal's operational halt, boosting the energy sector.

[Image source=Yonhap News]

◆ Sangyoung Seo, Kiwoom Securities Researcher = After Treasury Secretary Yellen advocated for increasing tax revenue in the long term to fund government spending by raising corporate taxes, selling pressure emerged. Although better-than-expected economic data highlighted the possibility of economic normalization and Germany withdrew its announcement of an economic lockdown, it was insufficient to sustain the upward momentum.

As Secretary Yellen mentioned, if the corporate tax rate is raised from 21% to 28%, the S&P 500's earnings per share (EPS) for 2022 is expected to decline by about 9%. Her remarks that tax revenue expansion should be proactively implemented to fund infrastructure investments are increasing political uncertainty in the U.S.

Furthermore, technology stocks extended their losses after news that President Joe Biden nominated Lina Khan as the head of the Federal Trade Commission. Lina Khan is primarily known for activities aimed at dismantling the monopolistic positions of technology companies.

On this day, the semiconductor sector showed weakness in the U.S. stock market. Although Intel announced that its first-quarter results would improve compared to previous forecasts, there were projections that overall performance this year would fall short of market expectations. Tesla declined following the Chinese government's withdrawal of the 'New Energy Vehicle Models List' that exempts purchase tax.

◆ Hyojin Kim, KB Securities Researcher = The European economy is expected to recover to pre-COVID-19 levels by the second quarter of 2022. Compared to the U.S., the slower recovery is likely to lead to a weaker euro and a stronger dollar for the time being. However, the European Purchasing Managers' Index (PMI) significantly exceeded market expectations, suggesting growing confidence in the economy.

The March European PMI improved in both manufacturing and services sectors. Manufacturing and services PMI recorded 62.4 and 48.8, respectively, significantly surpassing the expected 57.6 and 46. Germany's manufacturing PMI reached 66.6, the highest since statistics began.

Recent decisions to extend and strengthen lockdowns are delaying economic recovery, but some countries like Spain are seeing steady declines in confirmed cases, leading to improvements in consumption and leisure activity indices. In the UK, where vaccination is progressing rapidly, COVID-19 cases have dropped to one-tenth of the level at the beginning of the year, improving activity indices. Although this year's economic growth forecast may be slightly lowered, as vaccination accelerates and economic recovery continues, next year's growth rate is expected to be revised upward.

◆ Jungwon Kim, Hyundai Motor Securities Researcher = Concerns about economic slowdown due to the resurgence of COVID-19 in Europe are likely to be resolved considering the current vaccination status in major countries and expectations for improved stock market performance since the beginning of the year.

With high expectations for earnings improvements globally since the start of the year, the recent renewed optimism about KOSPI earnings could positively influence both global and domestic stock markets. Currently, attention should focus more on the decline in the U.S. 10-year Treasury yield, which had surged earlier this year, rather than on safe-haven demand due to the resurgence of COVID-19 in Europe.

In the U.S. stock market, the Russell 2000 index, which has the highest earnings improvement expectations, recorded the highest returns since the beginning of the year, followed by the Dow Jones, S&P 500, and Nasdaq indices. In the domestic stock market, if sectors with earnings improvement expectations show strength, interest should expand beyond leading stocks such as automobiles, chemicals, and electronics to include cosmetics, steel, and securities sectors. Looking at the changes in first-quarter operating profits of major sectors since the beginning of the year, transportation, steel, and securities sectors showed significant improvements in operating profit forecasts.

This content was produced with the assistance of AI translation services.