Uncertainty around taxes could cause stocks to pullback this month, strategist warns

Anastasia Amoroso, iCapital Network Chief Investment Strategist, joins Yahoo Finance Live to share why she sees a potential pullback from the stock market in September, what’s next for the crypto market and chats regulatory risks in China.

Video transcript

- Let's talk more about what we could see next. And for that, we turn to a market professional. Anastasia Amoroso is I Capital Network chief investment strategist. Anastasis, it's great to see you. You know, I was taking that little tour here this morning. And I was also looking at your notes on what you're seeing in this market here.

And you like a lot of the folks we've been talking to recently say we're sort of vulnerable here in the equity markets to some kind of pull back, some kind of correction. But I keep asking, what's going to trigger that vulnerability? What do you think of the contenders?

ANASTASIA AMOROSO: Yeah, Julie. It's interesting because, you know, you look at the market. And it's up so much. You look at valuations.

And you look at the seasonality of September. And that's what makes you draw the conclusion that we're vulnerable. But I was thinking about this morning.

The market has had a pullback of 2% to 3%. And all those pullbacks throughout the course of the year have been bought. So maybe given the amount of liquidity that we have in the system and the amount of monitoring.

Our fiscal policy support. Maybe that's all we get and maybe we're already gotten this little bit of seasonal volatility in September. I think to your question about what's going to trigger a deeper pullback or what could potentially, I think it is the uncertainty around taxes.

What's going to happen to capital gains? What's going to happen to corporate taxes? What's going to happen to taxes on foreign earnings?

So I don't necessarily think we might see a sharp 10% decline or so. But we might be in this holding pattern for now where stocks really cannot break out to the upside until we know, until the stock market knows what's going to come out of Washington.

How do you mark up 2022 earnings estimates when we don't know what the corporate tax rate is going to be? So I think we might be in maybe a little bit of a vulnerable situation here. But most likely just treading water for the next couple of months until we get that certainty from Washington.

- You're just staying on that higher tax debate, Anastasia. So do you think, you know, where we might end up on corporate taxes? The latest we've seen 26% from 21% currently. Is that a big headwind to the stock market if it does go into effect?

ANASTASIA AMOROSO: It's a small headwind to the stock market I would say. You know, first of all, from a government perspective, this is a huge item that they want to get done because it would raise $700 billion or so out of the $2 trillion that they're now trying to raise in the latest proposal.

From a stock market perspective, this would probably amount to less than 3% or so off of the 2022 earnings estimates. Now that's not everything. That's going to be in play.

You also have the GILTI tax. The tax on XUS Revenues of some of the corporations. And this is another headwind that we have to consider. But again, it's probably less than 2% or so.

So all in. We probably do have something like less than 5% vulnerability to 2022 EPS. And that's why I say that needs to be penciled in. The analysts will be sharpening those pencils, and they're going to be taking potentially those estimates down. But we're not talking about down 10%. We're talking about likely less than 5%.

- More short term in nature. Interesting market action yesterday, Anastasia. So we had a good at a very good retail sales report. We had also a very good Philly Fed report. That sent the 10 year higher in stocks lower a little choppy, but also high multiple stocks lower.

So is the next thing that can take us lower in the market surprisingly? Would that be good economic data?

ANASTASIA AMOROSO: Well, I think it might especially weigh on the tech sector. So tech has been once again the place to hide as the Delta cases have been surging. But what's happening now is the Delta cases seem to have peaked.

They're trending down, at the same time, consumers are finding ways to spend even if they're not booking that airline ticket. So I do think in the next few months, we're going to see a return for the turn for the better in economic data. And then on top of that, you know, you have this cyclicality that's going to be helpful to these reopening stocks. And that might nudge the 10 year rate higher as well.

So all of that is not going to be a great setup for technology because consumers will rotate out of their tech winners into some of these reopening trades. And then I go back to the tax issue.

You know, you have a lot of embedded capital gains in a lot of the tech sector that people love and hold a lot of it. So you could see some tax law-- tax harvesting there. You could see people locking in those gains before the tax rates go up.

And also the tech companies are probably the most vulnerable to the increases in taxes on foreign earnings as well. So Brian, I think we might see better economic data slightly higher rates, pushing up the reopening trade at the expense of some of those tech names.

- Anastasia, you probably don't know this. But you have just inserted yourself into a tax debate that Brian Saucy and I have been having. But I think there's a little bit in there for both of us in terms of the effect it's going to have, but maybe not a very large one.

In any case, I wanted to move on to where investors should be going right now, if they should be maybe avoiding tech. One of the places you like is energy, which is really interesting given that we have seen oil prices move higher. Bank of America making headlines earlier in the week saying we could see prices as high as $100 a barrel if we see a cold winter. Is that what's fueling some of your call to go into energy stocks?

ANASTASIA AMOROSO: Well, I think that's part of it. It's certainly oil being at 72 and maybe moving higher is helpful for energy stocks. But really one of the biggest reasons why I like the energy sector, it's everything it wasn't back in 2015 and 2016.

So first of all, this is one of the cheapest sectors of the S&P 500 now. But the cash flow is good. There's quite a bit of profitability around these current levels of oil prices.

And what's important too is what companies do with these cash flows. And energy companies are increasingly returning that cash to shareholders. You've got attractive dividend yields to some of the energy names. You've got buybacks.

And so I think that's what's luring investors back into the sector. The other fundamental reason I would say I would like energy is because we have this bigger decarbonization issue that needs to be solved. And it's not just going to be renewable energy, it's going to be things like carbon capture, and storage, and sequestration, and the oil sector is going to play a very big role in that.

So if clients may not have wanted to buy energy because it's not been front and center for ESG, I would say more and more oil companies are putting ESG front and center in their strategies. So they're cash flow positive, free cash flow generating, and they're redeploying that in ways that I think are quite consistent with where we see the future.

- Anastasia, also too switching gears on the crypto space. I know it's space you follow quite closely. What are your-- what's your latest thinking on there?

ANASTASIA AMOROSO: Well, short term, I think we're very interesting juncture for Bitcoin because we have seen it close above a moving average level. You know, you had a pretty constructive technical pattern that's forming. So I think that's a very interesting tactical setup that might lure buyers back into the space.

But you know, it's really not a market that we should trade short term. But stepping back longer term, I think this is going to be a very key emerging technology. And we're seeing more and more interest in the crypto space.

This year, Brian, I will say has been a breakout year for crypto. Not just in terms of performance, but also in terms of adoption. We've seen businesses that are more willing to accept crypto, they're willing to hold it as their own treasury holdings. We've seen consumers that have stepped up their trading, and we've seen assets under management and some of the crypto funds that have risen quite significantly.

So I think there's a wave of institutional consumer business adoption that's propping it up. And then there's this whole future potential, which is what's helping us start to calculate some sort of intrinsic value for things like Bitcoin. And the future potential for Bitcoin, in particular, lies in the payment sphere. If a fraction of global payments, global remittances, if that starts moving to the crypto sphere, that's pretty significant potential.

- Well, we know some of it's moving there in places like El Salvador. Although they had some hiccups with their unveiling of that. Finally, I want to ask you about China stocks, Anastasia.

Because you came out with a note where you talk about them. And I think you make an important point, which is that, you know, this avoidance of-- of wholesale tech stocks just the tech or the Chinese market excuse me overall. Sort of misses some opportunities perhaps. So where should investors be looking at China?

ANASTASIA AMOROSO: Yeah, Julie. The first thing I'll say is if you look at the China market, it's not this monolithic. Only one-- one sector. If you look at the Shanghai Composite which is the local a-shares market, it's actually up on the year. It's up close to 6%.

If you look at the Hang Seng index, the eight shares traded out of Hong Kong. They are down about 5%. So there's been divergence there.

The reason for that is the Hang Seng market is more tied to some of the sensitive tech names, whether it's the China entered names, or the gaming names, or the Casino names. And those are the spaces. That I actually still want to avoid.

Even though I'm a contrarian investor that normally would want to buy the dip, the fundamentals for China internet have changed. They're not going to be quite as profitable going forward in the next several years. And US tech is actually a more profitable place to be.

But if you look at some of the China local shares, there's a lot of cyclicality in them. There's financials, there's materials, there's industrials, there's more hardware tech. And the Chinese government after the data that we've been getting, which is pretty dismal and signals a slowdown, the Chinese government is likely to step up its stimulus measures.

So I think there's a very interesting tactical opportunities in China, local, domestic cyclical stocks. So that's why I would be looking.

- Anastasia, great to talk to you. Lots of really interesting actionable ideas I think for viewers. Anastasia Amoroso, I Capital Network, chief investment strategist. Thank you.