Investors continue to adopt the mantra of “don’t fight the Fed.” With inflation at a 40-year high, along with the yield curve coming significantly closer to another inversion, the market was understandably in risk-off mode. At some point, dip-buyers will come out of hibernation and signal a bottom has been reached. We thought that occurred two weeks ago, and there continues to be evidence to support that notion. But this week’s regression has raised questions.
On Friday the major averages finished sharply lower, thanks to the release of hotter-than-expected inflation data. May inflation increased to 8.6%, topping the 40-year high of 8.5% seen in March. This suggests the high cost of living is here to stay. The data also sparked a sharp rise in Treasury yields. The 10-year Treasury 12 basis points to 3.16%, while the 2-year jumped 24 basis points to 3.06%. The market decoded that as ammunition for the Federal Reserve to remain hawkish in its attempt to tame rising prices.
The Dow Jones Industrial Average plunged 880 points, or 2.73%, to end at 31,392,79. That was the Dow’s worst daily percentage decline since May 18. The blue chip index lost almost 5% for the week. The S&P 500 index lost 2.9%, falling 116.96 points to close at 3,900.86, while the tech-heavy Nasdaq Composite Index lost 414.20 points, or 3.52% to close at 11,340.02. For the week, the S&P 500 gave up 5.1%, while the Nasdaq booked a 5.6% decline. Not surprisingly, even the dip of this magnitude couldn’t entice value seekers.
The market has been anxious, anticipating the Federal Reserve's plan to battle high inflation, especially the impact to interest rate hikes this year. Given the stronger-than-expected May inflation number, it's possible that the market’s worst case scenario may be realized. Some analysts on Wall Street had anticipated an even more aggressive pace to higher rates this summer. There has been calls for a hike of 50 basis points in September, preceding by similar increases in June and July. As for the latter, some traders are pricing in a 30% chance of a 75-basis-point hike.
With that said, it would be premature to predict that the worst of the market correction is behind us. But with each leg lower, the buying opportunity gets harder to ignore, given the resiliency we have witnessed in the economy and labor data. As such, I continue to believe staying invested in the market is the best way to counter inflation, especially given all of the positive offsetting factors that still exists.
On the earnings front, here are the stocks I’ll be watching this week.
Oracle (ORCL) - Reports after the close, Monday, Jun. 13
Wall Street expects Oracle to earn $1.17 per share on revenue of $10.52 billion. This compares to the year-ago quarter when earnings came to $1.16 per share on revenue of $10.09 billion.
What to watch: With Oracle stock falling 22% year to date and 20% over the past year, the risk-versus-reward has become favorable, according to analysts at Morgan Stanley. At current levels, Oracle is an “interesting opportunity,” noted Analyst Keith Weiss who rates the stock as an Outperform with a price target of $88. Weiss said there is "increased confidence" the company can see a "modest revenue acceleration" in fiscal 2023 and grow above pre-pandemic levels for a sustained period of times. Part of the thesis has to do with the fact that the global cloud computing market size is forecasted to grow some 16% in the next four year, rising from $445 billion in 2021 to $947.3 billion by 2026. Oracle is poised to capture market share as the enterprise digital transformation continue. Although Amazon’s (AMZN) AWS and Microsoft’s (MSFT) Azure are dominant cloud players, Oracle is gaining traction. Currently seen as a transformation play based on its business transition towards a cloud subscription-based model, Oracle on Monday must demonstrate how it can become a future global cloud leader.
Adobe (ADBE) - Reports after the close, Thursday, Jun. 16
Wall Street expects Adobe to earn $3.31 per share on revenue of $4.34 billion. This compares to the year-ago quarter when earnings came to $3.03 per share on revenue of $3.84 billion.
What to watch: Adobe stock has declined 32% over the past six months, compared to the 13% decline in the S&P 500 index. Despite benefiting from the massive secular digitization trend that is poised to remain hot over the next two years, Adobe shares have been punished amid the recent correction in tech stocks. Notably, this is despite the company’s strong execution, evidenced by a 31% jump in Q1 revenue for the Creative Cloud segment and a 24% surge in the Digital Experience, driven by strong new user adoption and subscription revenue. However, investors have become concerned about the growth deceleration. The year-over-year rate of consolidate revenue growth in Q1 dropped sharply to 9% - the lowest growth rate since 2018. Adobe's flat year-over-year earnings per share growth was also a surprise. Adobe also spooked investors due to weak guidance. Management is being cautious due to slower digital marketing spending, which could limit revenue. But the stock is cheap, following the stock's near 50% pullback from all-time highs. And Adobe's free cash flow yield is now close to 4.5% near a five-year high. Now could be the time bet on a recovery.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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