Stalled debt ceiling negotiations stunted the momentum in stocks on Friday as investors shifted their attention to the potential risk of default. Although encouraging words surfaced from President Joe Biden earlier in the week regarding a potential agreement, on Friday Republican Rep. Garret Graves of Louisiana, a deputy for House Speaker Kevin McCarthy, said the negotiations were on pause.
The Dow Jones Industrial Average DJIA, ended lower on Friday, losing 109.28 points, or 0.33% to close at $33,426.63. A 3.46% decline in Nike (NKE) as well as declines in Disney (DIS), Salesforce (CRM) and Microsoft (MSFT) offset solid gains in IBM (IBM) and Intel (INTC). The S&P 500 index traded 0.14% lower to close at 4,191.98. Of the eleven S&P sectors, seven ended lower, led by Consumer Discretionary, while the top gainers were Energy and Health Care. The tech-heavy Nasdaq Composite index slid 0.24%, losing 30.94 points to close at 12,657.90.
Despite Friday's declines, all three major averages booked gains for the week, led by the Nasdaq Composite, which gained 3.04% for the week, logging its biggest one-week advance since March. The bulk of the Nasdaq’s weekly gains arrived on Thursday with investors betting that a handshake would be reached on the debt ceiling deal. That wasn’t the case on Friday, but index didn’t give up much of Thursday’s gains, suggesting that investors believe it's a matter of “when”, not “if.”
On Friday, stocks turned negative after reports surfaced that Rep. Graves referred to the White House team as “unreasonable,” according to NBC News. “We’re not going to sit here and talk to ourselves,” Graves said. This, however, was offset by slightly positive remarks from Federal Reserve Chairman Jerome Powell who on Friday said interest rates may not have to rise as much as expected to quell inflation.
Inflation is seemingly being tamed, evidenced by the the recent consumer sentiment as well as economic data. Although is not often attributed to Fed, but they deserve some credit for the job they are doing with controlling inflation in a manner that prevents a recession. That said, there is still the question of what the Fed will do at their policy meeting in June. But the inflation metrics, at least for now, would make it harder for them to maintain their hawkish stance.
In the meantime, as it relates to stocks, when factoring the positive revenue and earnings results among those that have reported financial results thus far, stocks have now regained what many analysts call “reasonable” valuation levels. The question is, which value stocks, or even sectors, can sustain the rally we are in? Investors with a long-term view, even during this resurgence, can still do well staying invested.
On the earnings front, here are the names I’ll be watching this week.
Palo Alto Networks (PANW) - Reports after the close, Tuesday, May 23
Wall Street expects Palo Alto to earn 93 cents per share on revenue of $1.71 billion. This compares to the year-ago quarter when earnings came to 60 cents per share on revenue of $1.39 billion.
What to watch: Cybersecurity specialist Palo Alto Networks has consistently outperformed the overall cybersecurity industry when it comes to growing revenues and profits. Offering a diversified suite of IT products, the company continues to benefit from its leadership position in key cybersecurity categories, and thus is expected deliver growth on both the top and bottom lines when it reports results for the quarter that ended April. With its shares up some 36% year to date, besting the 9.34% rise in the S&P 500 index, while climbing 30% over the past year, compared to 7% rise in the S&P 500 index, it appears the market has already rewarded the company for its performance. But it’s not yet time to take profits. Driven by an increasingly connected digital ecosystem and heightened cyber threats, there’s still massive opportunity in the cybersecurity landscape for 2023 and beyond. Through its wide array of integrated products and focus on AI-driven innovation, Palo Alto is strategically positioned to capitalize on this demand. Investors who have waited for a better entry point might have missed the recent stock surge, but they can still do well here. Cybersecurity will remain one of the hottest sectors in tech in the next five years. During which, the company is projected grow earnings at an average annual rate of 27.5%. The question on Tuesday, however, will be whether the company can provide strong guidance to keep investors (and analysts) excited about its stock.
Nvidia (NVDA) - Reports after the close, Wednesday, May 24
Wall Street expects Nvidia to earn 92 cents per share on revenue of $6.52 billion. This compares to the year-ago quarter when earnings came to $1.36 per share on revenue of $8.29 billion.
What to watch: Shares of Nvidia have gone on an impressive run over the past thirty days, rising close to 15%, compared with the 1% rise in the S&P 500 index. On a year-to-date basis the performance looks even better. The graphics chip giant has skyrocketed 116%, while the S&P 500 index has rising 9.34%. Essentially, since bottoming in mid-October last year NVDA stock has exploded. But with the forward P/E now closed to 65, is it time to take profits? It’s no coincidence that Nvidia’s popularity spiked around the same time the market began pivoting towards generative AI models such as ChatGPT which Microsoft (MSFT) has made a significant investment in via its partnership with OpenAI. The momentum created by ChatGPT forced investors to recognize the importance of Nvidia’s GPU data center accelerators which can potentially serve as the backbone for Microsoft’s AI infrastructure. Nvidia CEO Jensen Huang has declared that generative AI represents an “iPhone moment.” Bank of America analyst Vivek Arya sees an opportunity for Nvidia, referring to Nvidia's "full stack" of accelerated silicon, systems, software and developers which puts the company in a position to "lead the nascent generative AI arms race among global cloud and enterprise customers.” Unveiled in 2022, Nvidia’s accelerators such as the H100 means it has already developed generative AI accelerators to seize market share before the market is even identified. To continue to the stock's upward trend the company on Wednesday must talk positively about its growth prospects for the next quarter and beyond.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.