SOCDs ended Friday’s trading session rather mixed, despite a stronger-than-expected June jobs report. Investors again seem focused on rising inflation and rising interest rates, which is often a recipe for a recession. But despite the Dow and S&P 500 closing negatively, all three major averages posted weekly gains. This fact alone is cause for optimism.
Although investors are right to fear a recession, another encouraging reason for optimism is the sustained growth of the labor market, which is generally a lagging indicator of the true state of the economy. Friday’s jobs report revealed that 372,000 new jobs were created in June. Month-to-month, the number is slightly slower, but it is significantly higher than the 250,000 predicted by economists.
The report also revealed a 0.3% increase in average hourly earnings in June, down slightly from 0.4% in May. The modest slowdown in wage growth can be seen as an encouraging sign that a recession – if one were to occur – might not be as pronounced. That said, some indicators suggest a recession is already here, even though job demand is still strong. On Friday, the Dow Jones Industrial Average fell 46.40 points, or 0.15%, to close at 31,338.15.
The S&P 500 lost 3.24 points, or 0.08%, to end at 3,899.38, while the tech-heavy Nasdaq Composite added 13.96 points, or 0.12%, to end at 11,635.31. For the week, the three major benchmark stocks posted weekly gains, with the Nasdaq leading the way to a nearly 5% gain. The Dow Jones gained 1.2% and the S&P 500 – which had four consecutive positive closing sessions – gained 2.1%. Some investors are attributing the recent rally, particularly in growth stocks, to a sign that the Federal Reserve may be less hawkish in the coming months as it tries to tame inflation.
Whether the rally continues remains to be seen. But with the S&P 500 down more than 18% year-to-date, and still looking for a bottom, this could be a buying opportunity as second-quarter earnings reports are due in the coming weeks. As such, investors are seemingly scrambling to add risk, focusing on large-cap stocks with strong balance sheets that have been punished. Here are the gains I will be watching this week.
Pepsi Co (DYNAMISM) – Reports before the open, Monday July 11
Wall Street expects PepsiCo to deliver EPS of $1.74 per share on revenue of $19.49 billion. That compares to the year-ago quarter where earnings were $1.72 per share on $19.22 billion in revenue.
Keep an eye on: Defensive consumer stocks were the safe havens investors flocked to during the market correction that punished high-growth tech stocks. One of the names that caught my eye is PepsiCo. Although the snacks and beverages giant’s shares are down about 2% year-to-date, it has easily outpaced the S&P 500 index’s 19% drop. up more than 14% in the past year, while the S&P 500 is down 11%. That outperformance is poised to continue based on second-quarter soft drink sales data, which showed Pepsi gain nearly 13% in the quarter. The company’s investments in new brands and adapting to new trends have begun to pay off, as evidenced by the 6% uptick in organic revenue growth in the first quarter, in which organic revenue grew 13 % in North America and 14% for Frito-Lay North. America. Volume was also 6% higher for beverages. The company still believes there is plenty of room for growth in its core snacks and beverages business. On Monday, Pepsi will have to demonstrate this growth.
Delta Airlines (DAL) – Reports before the open, Wednesday July 13
Wall Street expects Delta to lose $1.65 per share on revenue of $13.58 billion. That compares to the year-ago quarter when the loss was $1.07 per share on $7.13 billion in revenue.
Keep an eye on: Airline stocks have been under pressure lately, due to the massive increase in flight cancellations during the July 4 holiday, which is usually one of the busiest travel periods in the EU. year. But that issue alone shouldn’t disrupt the opportunity that currently exists at Delta Airlines, which is expected to generate up to $1.7 billion in operating revenue with margins of 13% to 14%. The airline recently said it now expects strong second quarter results, with adjusted total revenue “fully restored to 2019 levels”. “Total unit revenue is expected to be 7-8 points higher than originally forecast on capacity 1-2 points lower than forecast,” the update said. The demand for leisure travel is also growing rapidly. “The improvement in unit revenue was driven by widespread demand and strength in consumer, business and international travel prices, with improvement in the quarter,” the airline added. Thus, Delta’s profit margin is poised to return to pre-pandemic levels. Meanwhile, Delta stock is currently trading at a P/E multiple of 6.6 times 2023 estimates, which is significantly below its historical levels and makes it one of the best bargains in transportation stocks. .
JPMorgan Chase (JPM) – Reports before the open, Thursday July 14
Wall Street expects JPMorgan to earn $2.95 a share on revenue of $31.96 billion. That compares to the year-ago quarter where earnings were $3.78 per share on revenue of $29.96 billion.
Keep an eye on: Despite the prospect of higher interest rates, JPMorgan Chase shares have suffered over the past seven months. And that’s because interest rates aren’t the only metrics investors watch. Earlier this year, the yield curve inverted, which generally indicates that a recession is on the horizon. Inflation is also a problem that has already caused a noticeable slowdown in several sectors of the economy. As such, the stock is down 29% year-to-date and 27% over the past year. In the last thirty days alone, the stock has fallen nearly 15%. However, these problems are not new. And JPMorgan Chase, the world’s largest bank by market capitalization, has shown it can navigate these headwinds to restore shareholder value. At the current valuation, JPMorgan stock is valued at a forward P/E ratio of 9.5, which is below its five-year and ten-year average of 12.5 and 11.4, respectively. In other words, the market has become too bearish. The management team has a strong reputation for execution and capital deployment. Combined with its 2.50% dividend yield, which has risen on average nearly 8% over the past five years, JPMorgan looks like a solid opportunity ahead of earnings.
Wells Fargo (WFC) – Pre-opening reports, Friday, July 15
Wall Street expects Wells Fargo to earn 91 cents per share on revenue of $17.73 billion. That compares to the year-ago quarter where earnings were $1.38 per share on revenue of $20.27 billion.
What to watch: Rising interest rate environments, which the Fed has now repeatedly raised, are generally good for bank stocks. This is because the profits banks make are highly correlated to how they invest deposits relative to the interest they pay consumers on those deposits, known as the spread. However, the prospect of higher interest rates alone did not prevent Wells Fargo stock from falling along with the broader market. Currently down 17% year-to-date, with a 9% drop in the past year, WFC stock is down more than 30% from its 52-week highs. This drop has created what I think is a great buying opportunity. Besides the fact that the bank recently passed the Fed’s stress test and increased its quarterly dividend by 20%, it appears the market is discounting Wells Fargo’s tangible book value relative to its peer group which has less than deposits and loans. Additionally, the bank also has $20 billion in buybacks to execute over the next twelve months, thanks to its much stronger balance sheet thanks to the bank’s cost-cutting initiatives. Having overcome its legacy issues, Wells Fargo appears ready to look to the future and achieve its growth goals.
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