- Selling pressure in US stocks could ease after tax day passes on April 18, according to Fundstrat.
- Some investors face big tax bills after a strong 2021 in the stock market and are selling stocks to raise funds.
- "Our work shows that raising funds for 'capital gains' is worse in years when S&P 500 gains were strong," Fundstrat said.
Selling pressure in the stock market could ease next week once tax day passes on April 18, Fundstrat's Tom Lee said in a note on Wednesday.
After a strong 2021 for the stock market, cryptocurrencies, and NFTs, some investors are likely facing big tax liabilities that are due next week. And to meet those tax liabilities, many investors have likely been selling stocks to raise cash.
"Our work shows that raising funds for 'capital gains' is worse in [a] year when S&P 500 gains were strong," Lee explained. The S&P 500 delivered a total return of about 29% last year, representing its strongest year of gains since 2013.
Additionally, Fundstrat found that stocks usually fall in the week before tax day when stocks delivered strong gains in the prior year, adding to the idea that investors wait until the very last minute to sell stocks in order to raise capital for a big tax bill.
"Since World War II, when markets are strong in a tax year, stock do poorly into tax day…[because] investors need to pay capital gains. They could be funding this via selling equities," Lee explained.
Fundstrat found that in tax years when the S&P 500 gained more than 20%, the median returns in the stock market in the week prior to tax day were usually lower, with a win ratio of only 43%.
Next week could be a positive inflection for the stock market and deliver a solid risk/reward profile for investors as tax day passes and as earnings season gets underway, according to Lee.
"We believe 1Q2022 EPS season will show that companies margins are still expanding," Lee said, adding that would be a positive factor for further upside in stock prices. Lee specifically expects companies in the healthcare, consumer staples and discretionary, industrials, and energy sectors to deliver better than expected profit margins.