Weekly Market Preview: Stocks Rocked By Increased Trade Tension, Investor Panic
I was asked recently whether the fears of trade war between the U.S. and China would rattle the stock the market. It didn’t take long for that answer to be revealed. Admittedly, while I did expect some volatility this week, the degree of panic exceeded even my worst-case scenarios as the Trump administration followed through with its move to raise import tariffs on $200 billion in Chinese goods.
While analysts remain broadly positive about the the direction of the U.S. economy, growth and profit expectations will have to be reset until there’s a resolution with trade. China has promised to retaliate to the tariffs, leaving analysts to speculate on the impact this will have on their corporate forecasts, thus their price targets. The question is, now that the S&P 500 and the Nasdaq have logged their worst week of 2019, is trade risk completely baked into stock prices, particularly those of U.S. multinationals which have more than 40% their revenue tied to China?
It’s for this reason chip stocks, namely Micron (MU), Qualcomm (QCOM) and Broadcom (AVGO), were punished this week. The good news is, talks between the U.S. and China are expected to continue, which helped stocks to end Friday’s session higher after suffering for much of the week. All three major indexes saw a mini rally in the last two hours of trade. The Dow Jones Industrial Average staged a stunning reversal, clawing its way back from a 360-point drop on the day to close up 114 points, or 0.44% to 25,942.37.
The S&P 500 index gained 10.68 points 2,881.40, while the tech-heavy Nasdaq added 6.35 points to 7,916.94. Still, all three major averages fell for the week. Both the Dow and the S&P 500 ended the week down 2.2%, while the tech-heavy Nasdaq lost 3.0%. Heading into the new week, however, investors want to know, have we seen the worst of these declines? Tom Essaye, president of the Sevens Report, had this to say: “Despite the tariff increase, the outlook for a trade deal in the relatively near future remains cautiously optimistic,” he wrote in a note to clients.
In other words, investors should tread lightly for now, but equities will be fine in the long run. And Friday’s rally suggested the market has adopted that thinking. Here are this week’s stocks to keep an eye on.
Alibaba (BABA) - Reports before the open, Wednesday, May 15
Wall Street expects Alibaba to earn 98 cents per share on revenue of $13.42 billion. This compares to the year-ago quarter when earnings came to 83 cent per share on revenue of $8.92 billion.
What to watch: Is now the time to bet on an Alibaba recovery? Although the company has been impacted by trade tension, Alibaba’s recent investments, particularly its "new retail" efforts aimed at merging elements of online and offline commerce, could help it widen the gap between it and rivals such as JD.com (JD). The latter just reported its own strong quarter. For Alibaba, the Chinese e-commerce and tech giant has rolled out various cloud products aimed at meeting the needs of customers who are migrating more towards the realm of Artificial Intelligence, Machine Learning and Internet of Things. The management is confident about the long-term trends of the business. Wednesday’s results and BABA’s guidance will reveal how much confidence the company in these initiatives and how much faith investors should put into Alibaba.
Cisco (CSCO) - Reports after the close, Wednesday, May 8
Wall Street expects Cisco to earn 77 cents per share on revenue of $12.9 billion. This compares to the year-ago quarter when earnings came to 66 cents per share on revenue of $12.46 billion.
What to watch: Can Cisco continue to grow revenue despite operating in a mature market? The Dow bellwether continues to scale back its switching and routing businesses, while trying to develop growth businesses within service areas such as security, the cloud, data center and analytics. Progress in these areas have been decent, though unspectacular. But the Street is eager to see what will its 2019 guidance look like. On Wednesday Wall Street will want to see the extent to which Cisco’s forecast can signal how businesses are spending on infrastructure, while signaling how tariffs have impacted Cisco’s confidence.
Walmart (WMT) - Reports before the open, Thursday, May 16
Wall Street expects Walmart to earn $1.02 per share on revenue of $124.99 billion. This compares to the year-ago quarter when earnings came to $1.14 per share on revenue of $122.69 billion.
What to watch: Can Walmart’s e-commerce revenue continue to grow? The company’s digital revenue have shown tremendous growth, surging 33%, 40%, 43%, and 43%, respectively, in the first, second, third, and fourth quarters of fiscal 2019. Remarkably, the company’s online business has demonstrated that it can sustain the juggernaut that is Amazon (AMZN). Despite these impressive results, Walmart stock is up roughly 8% in 2019, trailing the S&P 500’s 14% rise. On Thursday the company not only must deliver a top- and bottom-line beat, Walmart must outline the strength of its e-commerce business and ways to sustain margin and comp growth.
Nvidia (NVDA) - Reports after the close, Thursday, May 16
Wall Street expects Nvidia to earn 79 cents per share on revenue of $2.2 billion. This compares to the year-ago quarter when earnings came to $2.05 per share on revenue of $3.21 billion.
What to watch: Shares of the graphic chip powerhouse, which has delivered eleven consecutive beat-and-raise quarters, have been punished during the recent tech selloff, falling 12% over the past thirty days, while plunging 33% in twelve months. Investors have grown concerned about the market for graphics cards used in video games, which has become more magnified amid the trade war with China. But given the company’s exposure to multiple growth markets such as Datacenter, autonomous driving, artificial intelligence, among others, Nvidia stock could be poised for a rebound. On Thursday the company’s guidance could be a catalyst to revive not only NVDA stock, but also the entire chip sector.
Baidu (BIDU) - Reports after the close, Thursday, May 16
Wall Street expects Baidu to earn 53 cents per share on revenue of $3.55 billion. This compares to the year-ago quarter when earnings came to $1.88 per share on revenue of $3.01 billion.
What to watch: The company’s increased investments in its core search business, the cloud and artificial intelligence technologies, while divesting non-core business, continues to pay off. A recent survey ranked Baidu Cloud fifth in terms of market share in the second half of 2018, according to the IDC China Public Cloud Services Tracker. Meanwhile, its efforts to bolster its presence in the autonomous driving to compete with Google (GOOG , GOOGL), among others, should drive top-line growth for years to come. But a potential decline in the Chinese economy, along with the trade war, has become a concern for investors, which makes its guidance on Thursday even more important for the near-term performance of the stock.