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Market Outlook: Tax globalisation and US spending plans

A number of stock exchanges have started April on the plus side, helped by record-high purchasing managers' indices and improved American labour market data. Nearly a million new jobs were created in the United States during March, and unemployment fell to 6% (before the pandemic it bottomed out at 3.5%). Ten-year US Treasury yields have climbed above 1.70% at times during the past week, demonstrating that risk appetite is managing so far to co-exist with higher yields.

Tax globalisation and US spending plans

Ahead of this week's International Monetary Fund (IMF) meetings, US Treasury Secretary Janet Yellen said that she will work with other advanced economies in the Group of 20 (G20) to enact a global minimum level of corporate income taxation. Raising US corporate taxes (from 21% to 28%) is also a key parameter in financing new federal spending packages.

Part 1 of President Joe Biden's Build Back Better package − the American Jobs Plan − was unveiled last week. It allocates USD 2 trillion for infrastructure, green jobs and green energy development aimed at strengthening US competitiveness and combating the climate crisis. This is equivalent to about 1% of gross domestic product (GDP) annually for eight years. Within a few weeks, the administration will unveil part 2 − the American Families Plan − which will include spending on education, child care, health insurance and families with children.

But these spending packages require congressional approval. With his paper-thin majority in the Senate, Biden will have to work hard to bring all Democrats on board, including those who want to avoid large budget deficits and more government involvement in the economy.

Upward revision in Swedish growth forecast for 2021

Swedish sentiment indices have climbed, and the National Institute of Economic Research (NIER) Economic Tendency Indicator is well above the historical average. This upturn continues to be driven by a strong manufacturing sector, whereas confidence in other sectors is still a bit short of more normal levels. Actual data have also turned out to be weaker than the levels foreseen by various indicators in recent months.

Yet there are many signs that growth will remain weakly positive. We have thus revised SEB's Swedish GDP growth forecast for the first quarter of 2021 to +0.4%, instead of our previous estimate of -0.4%. We expect pandemic-related restrictions to continue slowing economic growth during Q2 as well, but we have still revised our full-year GDP forecast to 3.5%, while lowering our forecast for 2022 to 4.4%.

NIER believes that the recovery will gradually resume during Q2, despite delivery problems in portions of the manufacturing sector. But as COVID-19 vaccinations expand and virus transmission declines, consumption is expected to increase during Q3 and lead to stronger economic conditions.

Economic Insights: Increased economic resilience against COVID-19 restrictions

Despite lockdowns and restrictions, economic forecasts have recently been revised upward. For example, we now believe that global GDP will increase by 5.5% this year, mainly due to higher expectations for the US economy. Click here for SEB's full Economic Insights report.

Our market view

Recovery will support stock markets

Strong investor faith in a coming economic recovery is providing support to stock markets. Another contributing factor is that the upturn in US Treasury yields has levelled off somewhat in the past week. Most observers, including us, expect continued small upturns in yields during 2021 and believe that sharp earnings increases among listed companies will provide sufficient support to share prices.

Excessively rapid and/or large yield increases may of course disturb this scenario. Likewise if production disruptions − such as the semiconductor and other component shortages reported by many companies − have an impact on corporate earnings. The quarterly report season that will begin during April will be important to future share prices. Despite these risks and recent price upturns, we are sticking to our cautiously optimistic view of stock markets.

In our main scenario, we anticipate a clear economic recovery starting this spring or summer, with solid growth at least well into 2022.

In an economic recovery, cyclical value companies should be able to regain some lost ground, but looking further ahead the digitisation trend will continue to benefit growth companies. Sizeable worldwide investments in sustainability suggest that last year's strong performance for companies with this type of strategy may continue.

Share valuations today are undoubtedly high from a historical perspective, but can be justified by lower interest rates and bond yields as well as a strong earnings outlook. These high valuations limit upside potential in the long term, but they are rarely a good signal to sell in a short-term perspective.

Continued potential, though a lot has been priced in

Given today's low interest rates and yields, it is hard to find good alternatives to stock market returns. Meanwhile, central banks and governments have established a floor by promising continued stimulus.

This suggests that the growth picture will have to become much worse, causing downward adjustments in companies' earnings forecasts, and/or yields will have to climb much more than expected, for major stock market downturns to materialise. Recent market upturns naturally increase the risk of profit-taking, with downturns of 10% or perhaps 15%, yet we expect stock market indices to be a little higher this coming autumn than today.