Market snapshot: why stock markets are nervous

While there's lots to be optimistic about right now, the path higher for stocks is not an easy one.

The escalation of the pandemic in India and reports of planned tax hikes in the US are keeping the lid on market exuberance.

With the situation also worsening in the likes of Brazil and Japan amid the discovery of new variants, and quite apart from the human cost, sentiment has been dented by the possible impact on demand for and supply of commodities in particular.

In the US, the reportedly sharp rises in both capital gains and income taxes being proposed by the White House are in addition to a possible hike in corporation tax. While any monies raised would be used to fund projects such as childcare and paid leave for workers, as well as offsetting some of the cost of the American Rescue Plan, the implications for both equities and wealthier individuals were enough to halt the market’s recent run in its tracks.

Even so, the Dow Jones remains ahead by 10.5% in the year to date, closely followed by the S&P 500 showing gains of 10%, with the Nasdaq up 7%.

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Further clues on the current stage of the economic recovery will be provided in a bumper set of company reports on both sides of the pond next week.

In the US, particular focus will be on technology stocks. With higher valuations come higher expectations, and investors are still considering how much of the shift in behaviour arising from enforced lockdowns will translate into the post-pandemic world. With the potential for increased regulation an ever-present threat in the background, the likes of Tesla (NASDAQ:TSLA), Twitter (NYSE:TWTR), Google owner Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) will need to provide strong comfort that the surges in their share prices can be maintained.

For the UK, quarterly updates from the major FTSE 100 sectors of the banks, oils and pharmaceuticals, as well as reports from the likes of Sainsbury's (LSE:SBRY), Persimmon (LSE:PSN) and Unilever (LSE:ULVR) will confirm whether the recent switch into cyclical and value stocks has been justified.

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Outlook comments will also be of particular interest, as well as potentially positive news on any release of provisions from the banks as recently seen in the US and how much of an impact the recent surge in the oil price has had on the majors. In the meantime, the FTSE 100 stands ahead by 7% in the year to date and its shorter term direction will be affected by the raft of reports next week.