What Traders Can Expect After Earnings Season

By: Wayne Duggan

The third-quarter earnings season is off to a very strong start, and it seems at this point that traders concerned about a disappointing quarter can breathe a sigh of relief. Assuming the remainder of earnings season continues to go smoothly, the S&P 500 is well-positioned to potentially finish 2021 at new all-time highs.

But just because the final earnings season of the year is lining up to be a good one doesn’t necessarily mean the last 2 months of the year will be smooth sailing for the stock market. Here are 4 catalysts that traders will be watching after earnings season is over.

Federal Reserve Tapering
The Federal Reserve has indicated it will begin tapering its $120 billion in monthly asset purchases soon. A recent CNBC survey found that investors are expecting the Fed to officially announce its tapering plan in November and begin dialing back its bond buying starting in December.

If the Fed announces a more aggressive tapering plan than the market is expecting, it could spook investors. Not only would it suggest that the market will be losing its monthly stimulus faster than expected, investors may see aggressive tapering as a red flag that the Fed believes it will need to raise interest rates to slow down the economy sooner rather than later.

Inflation
The main reason the Fed may be forced to aggressively taper is persistent inflation. Fed Chairman Jerome Powell has repeatedly said elevated inflation levels are “transitory” as the U.S. economy opens back up fully following the pandemic. However, Powell conceded in September that inflation has been “frustrating” and that inflationary pressures have been “larger and longer-lasting than anticipated.”

Supply chain disruptions, labor shortages, and booming consumer demand have contributed to rising inflation. The Fed is expecting that inflation will moderate in 2022. If it does not moderate or if it continues to rise, the stock market could take a hit.

COVID-19
U.S. COVID-19 hospitalization and death rates have been improving, but there is still a risk that the onset of winter flu season will bring a spike in COVID-19 cases. In addition, news of any new variants of COVID-19 that have resistance to the current batch of vaccines and boosters would likely rattle the market.

If flu season comes and goes without any major negative COVID-19 headlines, it could be a bullish catalyst for the stock market and a sign the combination of vaccinations and natural immunity has finally reduced COVID-19 risk in the U.S. in a significant way.

Tax Hikes
President Joe Biden has proposed several major changes to tax policy that could be market moving. The biggest change would potentially be his proposal to raise the corporate tax rate from 21% to 28%, which would significantly eat into corporate earnings. Biden is also looking to impose a 15% minimum tax on global pre-tax corporate book income for companies with more than $2 billion in net income. In addition, he has proposed raising the top marginal income tax rate on individuals from 37% to 39.6% and taxing capital gains as ordinary income for taxpayers with an adjusted gross income of more than $1 million.

There’s a high likelihood Biden will be forced to compromise on at least some of his tax proposals. But the timing and the details of the tax policy changes will likely have a big impact on the stock market.

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