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Capital Gains Tax May Not Derail Wall Street Rally: 5 Top Picks

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Investors at the moment are concerned about the implications of the proposed capital gains tax hike by the Biden administration. Many believe that a planned capital gains tax hike may derail the stock market rally. After all, President Biden intends to almost double the capital gains tax to nearly 39.6% for well-to-do Americans. This would be the highest tax on investment income affluent Americans will be paying since the 1920s, as cited in an economictimes article.

However, investors shouldn’t panic because, traditionally, the stock market performs quite well when capital gains tax gets raised. As mentioned in a yahoofinance article, per LPL Financial, the broader S&P 500 has increased an average 1.4% in the three months before capital gains tax has been hiked, dating back to 1969. Similarly, in the next three-month, six-month, and 12-month period following a hike in capital gains tax since 1969, the S&P 500 gained an average of 6.4%, 2.1%, and 4.3%, respectively, added LPL Financial, per the yahoofinance article.

Let us also admit that there are a couple of factors that make us believe that the stock market rally won’t get hampered in the near future. First, the capital gains tax is expected to be much lower than anticipated. This is because it may not be easy to get the process of increasing capital gains tax. Such a hike needs to go through Congress, where Democrats have a narrow majority. Second, let alone capital gains tax hike, the U.S. economy is anyhow doing quite well, something that should help the stock market scale upward. The economy has been recuperating in recent times from the drubbing it took last year due to the coronavirus onslaught.

Manufacturing activity in the United States has shown signs of improvement on an uptick in demand for new orders despite supply chain constraints. Meanwhile, reopening of businesses, relaxation of various restrictions and progress in the pace of vaccination buoyed the U.S. service sector. To put things into perspective, the flash U.S. manufacturing purchasing managers index came in at a record 60.6 in April versus 59.1 in March, per IHS Markit, as cited in a MarketWatch article. Simultaneously, the flash US services purchasing managers index increased to a record 63.1 in April from 60.4 last month, added IHS Markit, as mentioned in the MarketWatch article.

Furthermore, there has been predominantly a significant uptick in consumer outlays in recent times due to the government’s stimulus measures. Additionally, American households are now pretty confident about their well-being, a tell-tale sign that consumer spending will improve further, eventually buoying economic growth. What’s more, the labor market has strengthened, with jobs being added at a steady clip while the jobless rate falling to 6% last month, as quoted in a Bloomberg article.

Therefore, with the economy showing enough signs of strength and Biden’s planned capital gains tax hike not expected to stall the stock market rally, it’s prudent to invest in top-notch stocks poised to grow in the near future. We have, thus, selected five such stocks that currently possess a Zacks Rank #1 (Strong Buy) and a Growth Score of A.

Conns, Inc. CONN is a specialty retailer currently operating retail locations in Texas and Louisiana. The Zacks Consensus Estimate for its current-year earnings has risen 25.4% over the past 60 days. The company’s expected earnings growth rate for the current year is a staggering 2,616.67%.

Dillards, Inc. DDS is a large departmental store chain featuring fashion apparel and home furnishings. The Zacks Consensus Estimate for its current-year earnings has risen 50% over the past 60 days. The company’s expected earnings growth rate for the current year is 200%.

L Brands, Inc. LB evolved from an apparel-based specialty retailer to a segment leader focused on women’s intimate and other apparel. The Zacks Consensus Estimate for its current-year earnings has moved up 41.7% over the past 60 days. The company’s expected earnings growth rate for the current year is 41.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Abercrombie & Fitch Company ANF operates as a specialty retailer of premium, high-quality casual apparel for men, women, and kids. The Zacks Consensus Estimate for its current-year earnings has climbed 26.8% over the past 60 days. The company’s expected earnings growth rate for the current year is 294.5%.

Bassett Furniture Industries, Incorporated BSET is a leading manufacturer and marketer of high quality, mid-priced home furnishings. The Zacks Consensus Estimate for its current-year earnings has advanced 16.8% over the past 60 days. The company’s expected earnings growth rate for the current year is 262.5%.

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Abercrombie & Fitch Company (ANF) : Free Stock Analysis Report
 
Dillards, Inc. (DDS) : Free Stock Analysis Report
 
Conns, Inc. (CONN) : Free Stock Analysis Report
 
L Brands, Inc. (LB) : Free Stock Analysis Report
 
Bassett Furniture Industries, Incorporated (BSET) : Free Stock Analysis Report
 
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