Will the Stock Market Rally Continue? 8 Experts Weigh In
We’re not out of the woods yet.
We’re not out of the woods yet.
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Stocks’ volatility continued Thursday, sparked by a weak start to second-quarter earnings season and another sizzling inflation update.
On the earnings front, JPMorgan Chase (JPM, -3.5%) this morning said profit in the second quarter was down 28% from the year-ago period, while revenue rose a modest 1%. The financial firm also said it is suspending stock buybacks in order to boost its capital reserves. Fellow big bank Morgan Stanley (MS, -0.4%) also saw its profit sink â down 29% year-over-year â while revenue plunged 11%.Â
Also in focus today was the latest reading of the producer price index (PPI), which confirmed what Wednesday’s scorching consumer price index (CPI) report already told us: Peak inflation was not reached last month. Data from the Labor Department showed that the PPI, which measures how much suppliers are charging businesses and their customers for their goods, surged 11.3% year-over-year in June, its seventh straight month of double-digit annual percentage gains. On a sequential basis, wholesale prices were 1.1% higher.
One positive from the report was that the core PPI, which excludes the volatile energy and food sectors, was up 0.3% over the prior month â or down slightly from May’s 0.4% increase.
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“Itâs clear that food and energy are driving PPI higher, as was the case in yesterday’s inflation print,” says Peter Essele, head of portfolio management for Commonwealth Financial Management. “When removing these volatile components, PPI appears to have peaked and is starting to roll over, a tell-tale sign that the economy is shifting into late-cycle territory. The probability of a 100-basis-point hike from the Fed in late July has greatly increased after the two price index releases.”
The one-two punch had stocks wallowing deep in negative territory for most of the morning, but the major benchmarks climbed well off their session lows by the close. The S&P 500 Index (-0.3% at 3,790) and Dow Jones Industrial Average (-0.5% at 30,630) still suffered their fifth straight loss, however, while the Nasdaq Composite ended marginally higher at 11,251.
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Other news in the stock market today:
Market volatility is likely to continue for the time being, which creates an especially uncertain environment for investors. “Inflation has taken a bite out of stock and bond markets â and the bite may not be over quite yet,” says Liz Young, head of investment strategy at SoFi. “Before the end of the month, we could get negative earnings guidance, a 75-100 basis point hike from the Fed, and a negative Q2 GDP print. This scenario could prove to be bad news for markets, but good news for buyers.”Â
Although Young suggests investors “don’t swing for the fences,” she does believe that “we have to start swinging the bat before summer is over.” And there’s certainly plenty good of pitches to hit for investors of all stripes.Â
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A whopper of a June jobs report landed in Wall Street’s lap Friday morning, and it kept investors and traders guessing all session.
Anyone looking to the Bureau of Labor Statistics’ latest employment situation for signs of a coming recession walked away mighty disappointed. The U.S. added 372,000 nonfarm payroll jobs last month, shattering consensus forecasts for 265,000. The unemployment rate held firm at 3.6% for the fourth consecutive month. And aggregate hours worked by private workers was up another 2.6% annualized during 2022’s second quarter, following 3.4% annualized growth in Q1.
“You just don’t see that in a recession,” says Bill Adams, chief economist for Comerica Bank.
Indeed, Adams believes between that and average monthly payroll job growth of 457,000 during the first half of the year, “it would be no surprise to see the first quarter’s contraction in GDP revised to growth as statistical agencies get more complete information to measure the economy; GDP is hard to measure in real time and subject to many revisions.”
This good news for the U.S. economy got a more nuanced reaction from the stock market, as some experts think the Federal Reserve could continue an aggressive pace of interest-rate hikes if the economy has strength to bear them.
Jason Pride, chief investment officer of private wealth at wealth management firm Glenmede, says of the central bank’s dual mandate of full employment and low inflation: “For the time being, [full employment] appears intact, affording the Fed the flexibility to tackle its price stability goal head-on. While next week’s [consumer price index] print will be the next important indicator to watch, today’s jobs report likely gives the Fed headway for another 75-basis-point rate hike later this month.”
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Stocks swung between shallow losses and gains throughout the day before settling with mixed results. The Nasdaq Composite (+0.1% to 11,635) closed in the black for the fifth consecutive session. However, Friday marked the end of winning streaks for the Dow Jones Industrial Average (-0.2% to 31,338) and S&P 500 (down marginally to 3,899).
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Other news in the stock market today:
Coming up next week: the start of a pivotal second-quarter earnings season. The earnings calendar will kick off with reports from the likes of Delta Air Lines (DAL), JPMorgan Chase (JPM) and UnitedHealth Group (UNH). And despite Friday’s encouraging employment news, a broader cadence of data pointing toward an eventual recession has some gloomy about the coming earnings season.Â
Lindsey Bell, chief markets and money strategist for Ally Invest, isn’t necessarily one of them.
“There are plenty of reasons to be cautiously optimistic heading into what could be a volatile Q2 earnings season,” she says. “Several companies have already cut profit outlooks while others have hinted at the broad economic backdrop being not so bad. With estimates having been reduced in some key sectors and stock prices down big from earlier this year, the bar might be low enough to spark a near-term rally.”
Cautious sentiment is often best met with prudent positioning. You ultimately want your portfolio to be able to harness any surprise upside without gambling on unproven stocks with lousy fundamentals.
One way to thread that needle can be found within the Dividend Aristocrats. A reminder: The Aristocrats are a group of 65 dividend stocks that have raised their annual payout in each of the past 25 years â at a minimum. But even within this subset of income-producing royalty, you can give yourself an even higher chance at success.
The 12 Dividend Aristocrats we’re featuring today don’t just have a fantastic dividend track record â they’re also trading at fire-sale prices and boasting higher yields than they historically do. Take a look.
This is Senior Investing Editor Kyle Woodley, letting you know it’s my final day with Kiplinger. I’m extremely grateful for getting to serve Kiplinger readers for the past few years, and I wish you both good health and good fortune.
We’ve reached the tail end of earnings season. However, there are still a handful of notable stragglers left to report â including memory chipmaker Micron Technology (MU, $58.71), slated on the earnings calendar to unveil its fiscal third-quarter results after the June 30 close.
Micron, like so many of its fellow semiconductor stocks, has struggled on the charts in the first half of 2022, down 37% for the year-to-date.
Still, MU remains a “top pick in semis” for UBS Global Research analyst Timothy Arcuri (Buy).Â
“Amid macro concerns, we believe investors continue to overlook several key factors,” Arcuri says. The analyst points to lower supply amid raw material shortages and a delay in equipment lead times, as well as demand that will be buoyed by a ramp up in new cloud server platforms in 2023. Arcuri says MU also remains the leader in NAND.
“Given all of these industry and MU-specific factors, we expect MU’s [earnings per share] EPS to hold up very well,” he adds.
For Micron’s fiscal third quarter, analysts, on average, are calling for earnings of $2.46 per share, up 30.9% on a year-over-year (YoY) basis. Revenue is expected to arrive at $8.7 billion (+16.8% YoY).
Nike (NKE, $111.43) is one of two Dow Jones stocks scheduled to report earnings this week, with the fiscal fourth-quarter results from the athletic apparel retailer due out after the June 27 close.
NKE stock has had a rough run in recent months â off 33% for the year-to-date. And the company’s troubles have not been not limited to the charts.
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“Nike’s global trends were likely worse than expected in its fiscal fourth quarter due to much tougher China lockdowns than the company implied in its guidance,” says Credit Suisse analyst Michael Binetti.Â
However, the analyst believes that while global supply chains remain tough, “consumer demand for the brand remains very strong, and we think Nike has been pushing harder to get inventory out to end markets in the U.S. & Europe to help offset transitory sluggish China trends in the quarter.”
Binetti has an Outperform rating on the consumer discretionary stock â the equivalent of a Buy â and recently lowered his earnings per share outlook for Nike’s fiscal fourth quarter to 84 cents from 95 cents to reflect the impact of China’s lockdowns.
As for the Street: Consensus estimates are for Nike to report earnings of 81 cents per share (-12.9% YoY) and revenue of $12.1 billion (-2.2% YoY).
Walgreens Boots Alliance (WBA, $41.63) is the second Dow Jones component slated to report earnings this week. The drugstore chain is set to unveil its fiscal third quarter results ahead of the June 30 open.
Analysts are projecting a rough quarter for WBA due in part to a slowdown in COVID-19-related sales. Consensus estimates are for EPS of 92 cents (-33.3% YoY) and revenue of $32.0 billion (-5.9% YoY).
But what’s likely to draw the bulk of attention is any color related to the company’s plans for Boots. Late last year, WBA said it was undergoing a strategic review of the U.K.-based drugstore chain. And earlier this month, a Bloomberg report, citing people familiar with the matter, suggested a consortium of investors â including Apollo Global Management (APO) â made an offer for Boots.
The bid values Boots at over $6.3 billion, according to Deutsche Bank analyst George Hill (Hold). “The proposal offers WBA the option to retain a minority stake in Boots after any deal,” Hill adds. “We do not expect Walgreens to fully harvest the full value of the sale price, and expect the company will maintain a minority position.”
Walgreens Boots Alliance’s recent sale of 6.0 million AmerisourceBergen (ABC) shares will also bring the company’s cash flow into focus. The proceeds, according to WBA, will be used to pay down debt and support its strategic initiatives.
“As WBA continues unwinding its ABC stake, the company should see a significant influx of cash in the next twelve months, which will provide a lot of capital deployment flexibility as the company retrenches around its core U.S. business and leaves its empire building phase of most of the last decade behind it,” Hill says.
WBA ended its most recently reported quarter with $669 million in free cash flow, or the money left over after a company has covered the capital expenditures needed to grow its business.
Karee Venema was long NKE as of this writing.
The heaviest part of earnings season has passed, but there are still plenty of notable names left to report. Among the biggest companies on this week’s earnings calendar are electronics retailer Best Buy (BBY, $70.65), chipmaker Nvidia (NVDA, $163.85) and discount goods chain Dollar General (DG, $189.63).
First-quarter earnings season so far has been solid by just about any measure, says Jeff Buchbinder, equity strategist at independent broker-dealer LPL Financial.Â
An impressive 78% of S&P 500 companies have beat earnings estimates for the quarter, slightly outpacing the long-term average of 77%, Buchbinder says. And 74% of S&P 500 firms reported higher-than-expected revenue â beating the five-year average of 69%, he adds.
“In this inflationary environment, the revenue is coming through,” the strategist says. “But it is profit margins that were the biggest test for corporate America this quarter, and companies passed that test with flying colors. Not only did margins hold up well quarter-over-quarter â falling less than anticipated â but analysts’ estimates for margins going forward still show margin expansion from current levels.”
It has been a heavy stretch for retail earnings, and based on the mixed results from Walmart (WMT) and Target (TGT), it was a tougher quarter than initially expected for many in the industry.
“U.S. retailers Target and Walmart presented a grim outlook at their earnings calls,” says the BCA Research Daily Insights team. “Although Q1 topline growth surprised to the upside, lingering pandemic supply-chain issues as well as higher freight, fuel and labor costs weighed down on both companies’ profits.”
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Wall Street will get a closer look at the group this week, with a number of retailers set to report. Among them is electronics retailer Best Buy, slated to unveil its first-quarter results ahead of Tuesday’s open.Â
“We see more downside than upside risk due to rising inflation and interest rates, affordability issues for key products, the Ukraine war further weighing on consumer confidence, and additional supply-chain issues in China,” says Wedbush analyst Seth Basham (Neutral).Â
And these pressures, as well as tough stimulus-related year-over-year comparisons, led to a sharp drop in store traffic trends in March, he adds.
For BBY’s first-quarter, analysts, on average, are anticipating a 26.9% year-over-year (YoY) drop in earnings to $1.63 per share. Revenue is expected to arrive at $10.4 billion (-10.3% YoY).
Nvidia has a strong history of beating Wall Street’s estimates on both the top and bottom line. But Susquehanna Financial Group analyst Christopher Rolland (Positive) thinks the semiconductor stock is in for a tougher time when it reports its Q1 results after Wednesday’s close.Â
“Unlike recent quarters, we believe any significant beat and raise may be capped by gaming headwinds,” Rolland says.Â
In addition to noteworthy price drops for Nvidia cards over the last year, “we have also witnessed a significant restocking, with all major card families now available at retailers. We believe the ‘reopening’ is the biggest driver of these changes and presents a potential intermediate-term narrative risk going into the quarter,” he adds.
However, Rolland believes weakness in this segment could be offset by strength for data center, which has become even larger than NVDA’s gaming segment. “Healthy underlying demand for NVIDIAâs products is being driven by hyperscale cloud computing, AI workloads, natural language processing, deep recommender models and vertical Enterprise products,” he says.
Rolland is expecting NVDA to report earnings of $1.30 per share and revenue of $8.1 billion in its first quarter. This compares to consensus estimates for earnings per share of $1.29 (+41.6% YoY) and revenue of $8.1 billion (+43.4% YoY).
Dollar General is another retailer that will report earnings this week, with first-quarter results from the discount chain expected out ahead of the May 26 open.
DG stock sold off sharply last week as negative reactions to several retail earnings sparked a sector-wide swoon. Shares of the retail stock are now down around 20% for the year-to-date and have shed almost 27% since hitting a record high near $260 in late April.
What can we expect from Dollar General’s Q1 report?
“We believe some of the headwinds highlighted by other players last week also have negative ramifications for DG including increasing cost pressures â fuel and LIFO [last in, first out;Â a method used to measure inventory] â and mix shifts,” says Oppenheimer analyst Rupesh Parikh (Outperform).Â
And while management addressed some of these headwinds in mid-March, “we believe weather and even stronger cost pressures on the food and transportation fronts suggest incremental risk vs. prior guidance,” Parikh adds. Still, the analyst says he “would buy any dips from here.”
Consensus estimates are for Dollar General to report earnings of $2.33 per share (-17.4% YoY) in its first quarter on revenue of $8.7 billion (+3.6% YoY).
Wall Street spent most of Friday applying some vibrant lipstick to what was otherwise a pig of a week for investors.
A broad market rally â one that saw each of the S&P 500’s 11 sectors finish higher â wasn’t a response to any new positive catalysts. Quarterly reports were light today, with most investors flipping the earnings calendar to next week’s retail-heavy slate.
And Friday’s most noteworthy datapoint was the University of Michigan’s latest consumer sentiment index reading, which dropped from 65.2 in April to 59.1 in May â a 10-year nadir that was well lower than the 64.1 reading expected.
Sometimes the market just enjoys a relief rally.
“Following a week of heavy selling, but with inflationary pressures easing just at the margin, and the Fed still seemingly wedded to 50-basis-point hikes for each of the next two FOMC meetings, the market was poised for the kind of strong rally endemic to bear market rallies,” says Quincy Krosby, chief equity strategist for LPL Financial.
He adds that given the Federal Reserve is only at the beginning of its rate-hike cycle and would like to see demand pull back further, “this rally will most likely weaken.”
Of course, even if this is just a pause before more market declines, investors don’t necessarily have to time the bottom to buy in at a decent valuation.
“This is still an attractive entry point, as we do not believe this is 1999/2000,” says Nancy Tengler, CEO and CIO of asset management firm Laffer Tengler Investments.
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The buying was strongest in consumer discretionary stocks (+3.9%) such as Amazon.com (AMZN, +5.7%) and Tesla (TSLA, +5.7%), along with technology plays (+3.3%) including Nvidia (NVDA, +9.5%) and Advanced Micro Devices (AMD, +9.3%).
Energy (+3.4%) was also bid higher amid a big pop in oil; U.S. crude futures finished 4.1% higher to $110.49 per barrel, helping to spark new highs in gasoline futures prices.
Notably absent from the rally was Twitter (TWTR, -9.7%), which sank after Elon Musk tweeted that the deal was “temporarily on hold.”Â
All the major indexes put up spectacular gains Friday, though for the week, it was still losses all around: The Nasdaq Composite (+3.8% to 11,805) still finished off 2.8% for the week, the S&P 500 (+2.4% to 4,023) was down 2.4% across the five days, and the Dow Jones Industrial Average (+1.5% to 32,196) closed the week 2.1% in the red.
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Inflation is prevalent virtually everywhere â including on corporate America’s earnings calls.
We’re most of the way through the first-quarter earnings season, and over the past few months, publicly traded companies keep repeating the “I” word as they discussed their most recent financial results.
FactSet used its Document Search technology to track mentions of the term “inflation” on corporate earnings calls, According to their senior earnings analyst, John Butters, of the 455 S&P 500 companies that have conducted earnings conference calls from March 15 through May 12, “377 have cited the term ‘inflation’ ⦠which is well above the five-year average of 155.”
In fact, this is the highest overall number of S&P 500 companies citing inflation on their calls going back to at least 210. (The previous record? 356 ⦠in the final quarter of 2021.)
It’s another signal that inflation continues to be a persistent problem â and with forecasts calling for still-high inflation to come, more active investors might do well to pack a little more protection. We’ve previously analyzed other ways to stay in front of inflation, such as stocks with pricing power and inflation-fighting funds.
Today, we look at another batch of investments that can help harness high inflation, with a focus on commodities, real estate and other areas of the market.
Kyle Woodley was long AMD, AMZN and NVDA as of this writing.
First-quarter earnings season keeps rolling on. Headlining this week’s earnings calendar will be entertainment giant Walt Disney (DIS, $110.71), oil name Occidental Petroleum (OXY, $62.97) and buy now, pay later company Affirm Holdings (AFRM, $25.04).
Through April 29, the percentage of S&P 500 companies reporting higher-than-expected earnings per share (80%) is above the five-year average (77%). However, the magnitude of the earnings beats (3.4%) is below the five-year average (8.9%), according to John Butters, senior earnings analyst at FactSet.
At the sector level, Butters says industrials and consumer staples have had the highest percentage of earnings beats at 91% and 89%, respectively. At the low end, real estate and consumer discretionary have the smallest amount of companies reporting earnings above estimates at 63% apiece.
Walt Disney will report its fiscal second-quarter earnings results after the May 11 close.
It has been a rough stretch for the Dow Jones stock, which is off more than 28% for the year-to-date, but another well-received earnings report could give DIS a boost.
In February, shares popped more than 3% after the company reported higher-than-expected earnings, revenue and Disney+ subscriptions.
Disney’s streaming service will be in focus this time around too, especially after Netflix (NFLX) stock sold off sharply when its latest earnings report showed the company’s first quarterly subscriber loss since 2011. However, unlike NFLX, Walt Disney “can monetize content through a variety of other channels, like merchandise and theme park revenue,” says David Trainer, CEO of Nashville-based investment research firm New Constructs.
And in addition to direct-to-consumer subscriber growth across Disney+, Hulu and ESPN+, which will help DIS stock outperform its peers, BofA Global Research analyst Jessica Reif Ehrlich says the company’s theme parks are on the upswing.Â
“Despite achieving near record results in its fiscal first quarter, international visitors still represent a minimal percentage of total attendance, hotel room occupancy remains well below peak levels as all hotels have not been reopened yet, cruise ship capacity remains below pre-pandemic peaks and parks are still operating below peak capacity levels,” Reif writes in a note to clients. “These should all be additional tailwinds over the next 18-24 months.”
As for Disney’s fiscal second quarter, consensus estimates are for earnings per share (EPS) of $1.06, up 34.2% year-over-year (YoY) and revenue of $18.8 billion (+20.1% YoY).
Occidental Petroleum has been in the limelight in recent weeks following news that Warren Buffett’s Berkshire Hathaway (BRK.B) increased its stake in the energy stock.Â
OXY first became a member of the Berkshire Hathaway equity portfolio in 2019, but the holding company more recently bought 91 million shares amid Buffett’s big spending spree.
The integrated oil and gas company will once again be in the spotlight when it unveils its first-quarter earnings results after Tuesday’s close.
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OXY ended 2021 in a strong position, returning to profitability on an annual basis after two years of losses and recording its highest free cash flow â or the money available after a company has met its financial obligations â ever.
The company no longer resembles the debt-ridden firm of fiscal 2020 following its “record-shattering fiscal 2021,” says Raymond James analyst John Freeman (Strong Buy).Â
“Leverage, which stood at around 4.8x at year-end 2020 â nearly double the Raymond James large-cap average â is estimated to fall below 1x by year-end 2022. The company, who remains completely unhedged in fiscal 2022, stands to generate a whopping $12.3 billion in free cash flow on our estimates of production of around 1.6 millions of barrels of oil equivalent per day (in-line with Street),” Freeman adds.
Underscoring this financial strength, analysts, on average, are expecting OXY to report earnings of $2.03 per share in Q1 versus a per-share loss of 15 cents in the year-ago period. Revenue is projected to jump 47.3% to $8.1 billion.
Affirm Holdings has not been immune to broad-market troubles in 2022, with shares down more than 75% for the year-to-date.
The reaction to the buy now, pay later (BNPL) stock’s mid-February earnings report â where AFRM shares slid nearly 21% the day after the results were released â only exacerbated these headwinds.
“AFRM has been pressured since reporting fiscal second-quarter results,” says Truist Securities analyst Andrew Jeffrey. This, according to Jeffrey, is due to a general multiple contraction, liquidity concerns and the perception of rising competition.Â
However, the analyst, who has a Buy rating on AFRM stock, isn’t worried. While the recent selloff creates an opportunity, “rising BNPL demand, driven by changing consumer demographics and tastes, creates opportunity for several providers.” And secular demand for BNPL “will outpace any cyclical headwinds.”
So what’s in store for Affirm’s fiscal third-quarter earnings report, due out after Thursday’s close?
Consensus estimates are for the company to record a per-share loss of 53 cents for the three-month period, an improvement over the $1.06 per-share loss it reported in the year-ago period. Revenue, meanwhile, is expected to climb 73.6% YoY to $344.0 million.