Investors Cheer Tax Reform Plan
27-Sep-17 16:30 ET
Dow +56.39 at 22340.71, Nasdaq +73.10 at 6453.26, S&P +10.20 at 2507.04
briefing.com
[BRIEFING.COM] The U.S. equity market moved into positive territory for the week on Wednesday as investors cheered the GOP's latest tax reform outline. Small caps led the rally, sending the Russell 2000 (+1.9%) to a new record high for the fourth session in a row. The Nasdaq (+1.2%) easily outperformed the S&P 500 (+0.4%) while the Dow (+0.3%) finished a tick behind.
Market participants received the tax reform framework on Wednesday morning, but it contained few surprises as many of the details were leaked to the media beforehand. President Trump gave a speech on the plan in the late afternoon, but provided little to no new information.
Some of the most notable highlights of the plan include cutting the corporate tax rate to 20% from 35%, doubling the standard deduction, and reducing the number of tax brackets to three (or possibly four) from seven. The individual tax rates would be set at 12%, 25%, and 35%, with a fourth option for the highest earners.
Details on how the government will make up for the immediate loss in tax revenue were limited. This topic will likely be an area of contention for the GOP going forward as many conservatives are opposed to the idea of driving up the federal deficit, which would probably be necessary to fund the tax overhaul--at least in the short term.
U.S. Treasuries finished broadly lower in a curve-steepening trade that left the 2-yr yield three basis points higher at 1.47% and the 10-yr yield eight basis points higher at 2.31%. The S&P 500's financial sector (+1.3%) outperformed as lenders cheered the steepening of the yield curve, which bodes well for their earnings prospects.
The information technology sector, the only sector more influential than financials, also soundly outpaced the broader market, moving higher by 1.1%. These two sectors exhibited relative strength throughout the session, keeping the broader market afloat during a long stretch of morning weakness.
Equity indices opened Wednesday's session with modest gains, but quickly retreated toward their flat lines. Sentiment picked back up in the early afternoon, sending the major averages to new session highs. At its worst mark of the day, the S&P 500 held a loss of 0.03% and, at its best, held a gain of 0.6%--marking an all-time high (2,511.75).
Three of the eleven sectors finished with notable losses on Wednesday--utilities (-1.4%), real estate (-0.8%), and consumer staples (-0.7%)--while only one, in addition to technology and financials, settled with a notable gain--consumer discretionary (+0.5%).
In earnings news, Micron Technology (MU 37.09, +2.91) jumped 8.5%, hitting its best level since the dot-com bubble, after beating both top and bottom line estimates and issuing upbeat guidance. The bullish sentiment radiated throughout the semiconductor space, sending the PHLX Semiconductor Index higher by 2.4%.
Conversely, Dow component Nike (NKE 52.67, -1.03) dropped 1.9% after the athletic footwear and apparel company topped earnings expectations for its fiscal first quarter on scant revenue growth and issued a disappointing gross margin outlook for the fiscal second quarter.
Reviewing Wednesday's economic data, which included August Durable Goods Orders, August Pending Home Sales, and the weekly MBA Mortgage Applications Index:
- August durable goods orders rose 1.7%, which is more than the 0.7% increase expected by the Briefing.com consensus. The prior month's reading was left unrevised at -6.8%. Excluding transportation, durable orders increased 0.2% (Briefing.com consensus +0.2%) to follow the prior month's revised uptick of 0.8% (from 0.5%).
- The key takeaway from the report is that it showed a continued pickup in business spending and a favorable translation of that increased activity for Q3 GDP forecasts.
- Pending Home Sales for August declined 2.6% (Briefing.com consensus -0.4%). Today's reading follows an unrevised 0.8% decrease in July.
- The weekly MBA Mortgage Applications Index decreased 0.5% to follow last week's 9.7% decline.
On Thursday, market participants will receive several pieces of economic data, including the third estimate of second quarter GDP (Briefing.com consensus +3.0%), weekly Initial Claims (Briefing.com consensus 275K), and Advance International Trade in Goods for August (Briefing.com consensus -$65.1 billion). All three reports will be released at 8:30 ET.
The Nasdaq and the S&P 500 will enter Thursday's session with week-to-date gains of 0.4% and 0.2%, respectively, while the Dow will enter flat.
- Nasdaq Composite +19.9% YTD
- Dow Jones Industrial Average +13.1% YTD
- S&P 500 +12.0% YTD
- Russell 2000 +9.4% YTD
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