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Wall Street's warning: Stocks could retreat this fall

Wall Street's warning: Stocks could retreat this fall

Posted: Sep 13, 2021 9:51 AM
Updated: Sep 13, 2021 9:51 AM

After notching heady gains this year, US stocks could be in for a back-to-school reality check.

What's happening: The S&P 500 has been in the red for five consecutive trading sessions, its longest losing streak since February.

Declines have been modest. But uncertainty about the state of the market rally is clearly building as Wall Street takes stock of the effects of the Delta variant on the economy and the impact of potential corporate tax hikes.

"Given what's priced in to market expectations, we do believe the pace of S&P 500 gains may slow," LPL Financial Chief Market Strategist Ryan Detrick recently told clients.

Remember: The S&P 500 has climbed 18.7% this year, hitting more than 50 record highs. Such a massive run doesn't leave much room for error in the months ahead.

One concern is the trajectory of Covid-19 infections as schools reopen and cold weather sets back in.

Last week, Goldman Sachs downgraded its growth forecast for the US economy in 2021 following a marked slowdown in job creation in August. It cited the Delta variant, which could slow consumer consumption, as one contributor.

In its monthly survey of more than 550 investors published Monday, Deutsche Bank found that 58% of respondents think stocks will pull back between 5% and 10% before the end of the year, while another 10% foresee an even greater correction.

Those surveyed identified "new variants that bypass vaccines" as the biggest risk to market stability, beating out fears about higher-than-expected inflation.

That's not all: In a new research note, Goldman Sachs said that tax changes, not disappointing economic growth, are the "key risk" to US stocks through year-end.

"Potential changes to the tax code will affect corporate earnings in 2022," the investment bank wrote. It estimates that hiking the corporate tax rate from 21% to 25% in the United States, along with greater taxes on foreign income, would reduce S&P 500 earnings by 5% — a possibility that investors may not have fully realized yet.

On the radar: House Democrats could push for even more ambitious changes as they work to pass a sweeping $3.5 trillion budget package. A proposal scheduled for release Monday calls for increasing the top corporate tax rate to 26.5% for bigger businesses.

Global view: Higher taxes could trigger a reassessment of stocks outside the United States, too. In the United Kingdom, the head of the Confederation of British Industry, a lobby group, is expressing alarm that businesses will have to pay more as the recovery from coronavirus continues. In March, the government proposed a corporate tax hike from 19% to 25% in 2023. It also wants employers to contribute more to cover health and social care costs.

"After the pandemic, we in business believe that we should pay our fair share to tackle the debts of Covid," Director-General Tony Danker will say in a speech Monday, according to prepared remarks. "That is why many business leaders accepted the jaw-dropping six-point corporate tax increase announced in March. But there is a real risk now that the government will keep turning to business taxes to carry the load."

Alibaba shares tumble on Alipay breakup report

Shares in Alibaba slumped again Monday after the Financial Times reported that Beijing is planning to break up Alipay, the hugely popular payment app owned by its financial affiliate, Ant Group.

The latest: Alibaba fell as much as 7% in Hong Kong, before trimming losses to roughly 4% at the close, my CNN Business colleague Laura He reports.

The stock has shed 46% since early November 2020, when Chinese regulators halted Ant Group's giant IPO at the last minute, shaving about $380 billion off Alibaba's market value.

Alibaba shares in New York are off 1.6% in premarket trading.

Step back: Ant Group was spun off from Jack Ma's Alibaba in 2011, though Alibaba still owns a third of the fintech company, which has been a top target of Beijing's campaign to curb the influence of private businesses.

Since yanking its IPO, regulators have ordered the company to restructure as a financial holding firm. Its superapp, which boasts more than 700 million monthly active users, may be next in line.

According to the FT, China wants to break up Alipay and create a separate application for its loans business. Regulators are also reportedly pushing Ant to turn over the user data that underpins its lending decisions.

There's more: On Monday, China's Ministry of Industry and Information Technology ordered the country's internet firms to end a longstanding practice of blocking rivals' links on their platforms. Other Chinese tech stocks also dropped sharply following the announcement. Meituan lost 4.5%, and Tencent fell 2.4%.

Football is back, boosting sports betting stocks

The National Football League's 102nd season is officially underway. That's a boon for sports betting stocks, even as the league tries to navigate the pandemic and falling TV ratings.

Shares of DraftKings jumped 22% in August and have rallied another 5% so far in September. The S&P 500, for its part, is off 1.4% this month.

UK-based Flutter Entertainment, which owns top DraftKings rival FanDuel, has gained 18% since the beginning of August.

The backdrop: A record 45 million Americans plan to wager on the 2021 NFL season, according to new research from the American Gaming Association. That's a 36% increase over last year.

The expansion of the legal sports betting market in the United States is a major factor. Per the AGA, the practice is now legal in 32 states and Washington, D.C., including 16 of the 23 states that are home to NFL teams.

Watch this space: The Delta variant could cast a shadow over the season. Last year, the league did not cancel a single game despite a number of postponements, but officials have expressed concern about the virus situation as games begin.

Fan interest will also be closely monitored. In 2020, ratings dropped 7%, according to data provider Nielsen.

Up next

Oracle reports earnings after US markets close.

Coming tomorrow: Apple is expected to reveal its latest iPhone lineup from its headquarters in Cupertino, California.

The-CNN-Wire
™ & © 2021 Cable News Network, Inc., a WarnerMedia Company. All rights reserved.

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