U.S. stock markets experienced heightened volatility on Tuesday following the unveiling of a new capital gains tax proposal by a coalition of Senate Democrats. The proposal, which seeks to raise the top capital gains tax rate from 20% to 28% for individuals earning over $1 million annually, is intended to fund expanded social programs and infrastructure projects. The announcement comes at a critical juncture, with the second-quarter corporate earnings season set to kick off later this week. Analysts warn that the proposed changes, if enacted, could lead to a near-term sell-off as high-net-worth investors rebalance portfolios to lock in lower tax rates before any potential legislation takes effect. "The prospect of a higher capital gains tax is prompting investors to re-evaluate their risk tolerance and time horizons," said Maria Thompson, Chief Investment Strategist at Hudson Asset Management. "We could see increased market churn as a result." In response, the S&P 500 closed down 1.4% on Tuesday, while the Nasdaq Composite dropped 1.9%, led by declines in high-growth technology stocks often favored by wealthy investors. Meanwhile, defensive sectors like utilities and consumer staples remained relatively stable. Adding to market jitters, the Securities and Exchange Commission (SEC) announced it is investigating several high-profile insider trading cases, including suspicious trades linked to recent merger and acquisition activity. SEC Chair Gary Gensler emphasized that the agency is stepping up enforcement efforts to "ensure a level playing field for all market participants." The dual pressures of potential tax hikes and regulatory crackdowns come as companies like JPMorgan Chase, Delta Air Lines, and PepsiCo prepare to release quarterly earnings. Analysts will be closely watching corporate guidance for the remainder of 2024 to assess whether firms anticipate any drag on investment or consumer demand stemming from the evolving policy landscape. While the proposed tax increase faces an uncertain path through a divided Congress, its mere introduction is already influencing market behavior. "Policy risk is back in focus for investors," said Thompson. "Expect more volatility ahead."