LIVE MARKETS-Fed easing, tax cuts and deregulation in focus

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FED EASING, TAX CUTS AND DEREGULATION IN FOCUS

Investors may be in another "good news is bad news" phase with stocks at record highs and the focus now on potential interest rate cuts, tax incentives and deregulation, according to Lisa Shalett, chief investment officer and head of the global investment office at Morgan Stanley Wealth Management.

Investors should pay close attention to second-quarter earnings results and guidance, Shalett writes in a note Monday. Second-quarter results for S&P 500 companies get under way in mid-July.

"Apparently climbing the proverbial wall of worry, markets have moved on from concerns about geopolitics, tariffs and economic slowing to focus on profit acceleration that could potentially come in 2026 from a constructive policy mix of Federal Reserve easing, corporate tax cuts and capital markets deregulation," she writes.

She says tax advantages could reduce the effective tax rate for S&P 500 companies to about 15% from the current 18% and the statutory 21%.

"Earnings and cash-flow impacts for shareholders will likely be concentrated in capital- and R&D-intensive sectors like tech, industrials, energy and health care," she writes.

But investors need to consider that the tax bill's overall net stimulus "will likely be modest and add to deficits," she notes, adding that deregulation can "produce winners and losers."

Deregulation too could be a "doubleedged sword," she says, noting that among other things stablecoin legislation is creating the possibility for "disruptive business models."

Rates are now expected to ease as well, with the expectations affected by "employment data is showing cracks based on a rising trend in continuing claims, weaker Conference Board 'jobs hard to get' readings and low hiring rates amid rising layoffs," she writes.

Still, small-cap and mid-cap stocks could benefit more from rate cuts than S&P 500 megacaps, she notes, "which are already aggressively pricing a supportive rate backdrop."

"Now is a time to keep one’s feet firmly on the ground, anticipate potential mid-single-digit equity price gains and be an active stock picker," she says.

(Caroline Valetkevitch)

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