US stocks quickly fell to session lows Thursday after reports that President Joe Biden is expected to propose much higher capital gains taxes for the rich.
The S&P 500 erased previous gains and fell 0.9%. The Dow Jones Industrial Average fell 330 points to its daily low, while the Nasdaq Composite was down 0.8%.
Bloomberg News reported Thursday afternoon that Biden is planning a capital gains tax hike of up to 43.4% for wealthy Americans. The proposal would increase the capital gains rate for those earning $ 1 million or more from the current 20% to 39.6%, Bloomberg News said, citing people familiar with the matter.
“Biden’s proposal effectively doubles the capital income tax rate for $ 1 million income recipients,” said Jack Ablin, founding partner and CIO of Cresset Capital Management. “That’s a significant cost increase for long-term investors. Expect a sale this year if investors think the proposal may become law next year.”
Growth stocks, which could come under selling pressure due to higher capital gains taxes, saw Tesla and Amazon decline on Thursday. The iShares S&P 500 Growth ETF fell 0.5%, more than its counterpart in value.
“The markets are heavily focused on a small number of growth names,” said Mark Yusko, CEO and CIO of Morgan Creek Capital Management. “These stocks have made the bulk of the gains over the past few years and many investors have made significant gains at current prices. Fears of a higher capital gain rate could motivate these names to sell and trigger a market correction. So some investors will attempt this one.” To use potential. ” Movement by selling or hedging by short selling. “
Before the news hit, key averages traded a little higher as investors scoured corporate earnings and economic data.
Southwest Airlines’ shares rose 1.7% after the airline announced that vacation bookings would continue to rise and “breakeven” by June. Southwest also posted a less than expected loss in the first quarter.
Dow Inc. fell more than 4% even after the chemical company beat earnings and sales estimates for the first quarter. The stock is still up more than 10% through 2021.
Investors also digested a better than expected weekly jobless claims reading. The Department of Labor said Thursday that initial unemployment insurance claims totaled 547,000, down from the Dow Jones estimate of 603,000.
So far, companies have largely exceeded Wall Street’s expectations this earnings season, but strong first quarter results are not allowing the market to climb higher after record highs rose near multi-year highs.
“The string of strong positive EPS surprises is likely to continue, but the increased valuations are now ubiquitous. Sentiment is overly optimistic. A possible corporate tax change is an overhang,” said Maneesh Deshpande, head of equity derivatives strategy at Barclays in one Note.
Even so, the company raised its year-end S&P 500 target to 4,400, which would translate into a 6% profit from here. Barclays warned that an uptrend beyond target is unlikely.
On Thursday, the Republican Party tabled its counter offer to Biden’s $ 2 trillion infrastructure plan. The senators proposed a $ 568 billion framework that includes funding for bridges, airports, roads and reservoirs. Tax increases are not included.
American Airlines erased previous earnings and went negative even after the company announced that cash flow was positive at the end of the quarter with no debt payments.
Shares rose on Wednesday to see a two-day decline as companies tied to the reopening of the economy led the way up. The Dow and S&P 500 are less than 1% off regaining their record highs last Friday amid ongoing optimism about the pace of the economic recovery.
– CNBC’s Maggie Fitzgerald contributed to the coverage.
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