Weekly Snapshot: Earnings to Watch for the Week of August 15 (CSCO, HD, TGT, WMT)

TThe prospect of “peak inflation” propelled stocks higher on Friday, extending a rally that helped the S&P 500 index close in positive territory for the fourth straight week. Notably, the S&P 500 index broke above a resistance level of 4,231 which has been closely watched as a measure that asserts that the bottom may have been reached.

On Friday, the Dow Jones Industrial Average rose 424.38 points, or 1.27%, to end Friday’s session at 33,761.05. The S&P 500 gained 72.88 points, or 1.73%, to end at 4,280.15. Of the eleven S&P sectors, ten closed higher, among which growth stocks dominated. The materials sector continues to post a notable outperformance, just ahead of technology stocks. The energy sector was the only group in the red on Friday.

The tech heavyweight Nasdaq Composite, which was brutally punished in the selloff, continued its resurgence, jumping 267.27 points, or 2.09%, to end at 13,047.19. As it stands, all major averages have gained around 2.5% for the week. What sparked Friday’s rally? Inflation appears to be under control, as evidenced by August’s consumer confidence index which rose more than expected to 55.1, according to the University of Michigan’s preliminary gauge. This put one-year inflation expectations at 5%, down slightly from 5.2%.

The market’s main concern for most of the year and throughout the sell-off has had to do with the direction of the overall economy: namely, can the Fed control inflation in a way that prevent a recession? Friday’s preliminary University of Michigan measurement, as well as Consumer Price Index (CPI) numbers this week suggest things are moving in the right direction. The CPI received on Thursday was stable from June to July, largely thanks to lower gasoline prices. Meanwhile, the increase in commodity prices showed a surprise decline.

All of these are positive signs that ‘peak inflation’ is more than a dream. That said, it remains to be seen what the Federal Reserve will do at its policy meeting in September. But inflation measures, at least for now, would make it harder for them to maintain their hawkish stance. In the meantime, when it comes to equities, taking into account lower revenue and earnings estimates for the rest of the year, equities have now recovered to what many analysts call low levels. “reasonable” valuation. The question is, which value stocks, or even which sectors, can support the rally we’re in?

While it’s premature to raise the “everything is clear” flag, there are still several undervalued or downbeat stocks that present buying opportunities, many of which can give portfolios an immediate boost. Investors with a long-term view, even during this resurgence, can still do well by staying invested.

On the earnings front, here are a few names I’ll be watching this week.

Home deposit (HD) – Reports before the open, Tuesday August 16

Wall Street expects Home Depot to earn $4.95 a share on revenue of $43.37 billion. That compares to the year-ago quarter where earnings were $4.53 per share on revenue of $41.12 billion.

What to watch: Home Depot has been a strong performer in the Dow for the past two years, but so far in 2022 the company has been hurt by soaring interest rates that have helped slow the housing market. If that wasn’t enough, the company’s gross margins have shrunk due to higher rates of inflation. Rising input costs and weaker consumer demand have eroded margins in this business. These had a negative impact on Home Depot stock, which has fallen 26% since the start of the year, lagging the 13% decline in the S&P 500 index. Interest rates have historically hampered home improvement stocks. That said, confidence remains in the housing market, which held up relatively well despite rising mortgage rates. From an execution perspective, the home improvement giant has built a strong track record beating consensus estimates, beating both revenue and earnings estimates over the past ten quarters. Nonetheless, the company’s forecast on Tuesday will be a key indicator of where management believes the housing market and consumer spending will be in the coming quarters.

Walmart (WMT) – Reports before the open, Tuesday August 16

Wall Street expects Walmart to earn $1.60 a share on revenue of $149.78 billion. That compares to the year-ago quarter where earnings were $1.78 per share on revenue of $139.87 billion.

Keep an eye on: The retail sector has been under pressure in recent months as investors digest the impact of rising inflation at a time when the Federal Reserve is also raising interest rates. It is for this and other reasons that Walmart is expected to report lower year-over-year profits on higher revenue when it reports results. The world’s largest retailer has not been immune to rising input costs and supply chain disruptions. Year-to-date, the company has cut its full-year earnings forecast by a dollar. The result of lower earnings estimates impacted the stock price which fell 20% from its 52-week highs of around $160. The stock is now down 11% from a year ago, lagging the S&P 500 index’s 7% decline. Although the rate hikes were not a surprise, investors nevertheless assess the potential impact on consumer spending, and perhaps worse, a recession. On Tuesday, the company will have to speak positively about its growth prospects and the macro impact on its customers.

Target (TGT) – Reports before the open, Wednesday August 17

Wall Street expects Target to earn 72 cents per share on revenue of $26.1 billion. That compares to the year-ago quarter where earnings were $3.64 per share on revenue of $25.16 billion.

To watch: how strong is the consumer? That’s what investors are asking before deciding to buy shares of Target, which plunged about 25% in a single day after the company last reported results. In addition to inflationary pressures and excess inventory, Target suffered from declining operating profit as well as earnings per share. The inventory issue was a misfire, albeit a well-meaning one. In order to alleviate supply chain issues, the company ordered more goods than needed. When those items didn’t sell, Target was forced to aggressively discount them so they could move, resulting in lower margins or outright losses. Analysts have since slashed earnings estimates for the company, which was also reflected in the stock price which fell 50% from its 52-week high of around $268. The stock is now down 37% from a year ago, trailing the S&P 500 index’s 7% decline. But the company has taken steps to address these operating issues, including plans to reduce freight and transportation costs. Tt will need strong top line and bottom line results and upside directions to regain investor confidence.

Cisco (CSCO) – Reports after closing, Wednesday August 17

Wall Street expects Cisco to earn 82 cents a share on revenue of $12.78 billion. That compares to the year-ago quarter when earnings were 84 cents per share on revenue of $13.13 billion.

Watch: When will Cisco finally turn the corner? As with the rest of the tech sector, the company has been punished over the past six months, losing around 30% of its value. The tech giant produces high-quality networking gear that its customers rely on, but investors aren’t so sure that that trust is worth the current share price. The company has worked to shift 50% of its business model beyond legacy hardware product sales to a more sustainable, recurring software subscription model. However, the transition has been volatile. The company’s revenue growth over the past few years has not been strong enough to make investors patient. That said, the company still generates strong free cash flow, in addition to an attractive yield of almost 3%. Additionally, the company’s strong cash flow generation allows the company to return excess cash to shareholders in the form of buyouts. In the first nine months of the current fiscal year, approximately $10 billion has been returned to shareholders. The company’s business is healthy enough to weather the revenue drought. But for any of that to matter, the company needs to show steady growth in its pivot to software and subscription businesses on Wednesday as it shrinks legacy hardware segments.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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