Weekly Preview: Earnings to Watch This Week (ADBE, ORCL)
It’s not a new mantra, but “don’t fight the Fed” is now the seemingly the currently-adopted theme in the stock market. That is, until inflation or rising bond yields becomes an issue that sparks a market selloff. I continue to believe staying invested in the market is the best way to counter inflation, especially given the pent-up demand for products and services as the economy continues to reopen.
In other words, taking into account the Fed's transitory inflation message, there remains plenty of reasons to maintain confidence in the market. And investors are seemingly adopting that mindset as, despite the strong jump in the May consumer-price index Friday, all three major averages ended in positive territory, suggesting the reflation trade is now on the back burner. On Friday the S&P 500 Index logged its second consecutive record close, rising 8.26 points, or 0.2%, to close at 4,247.44.
The Dow Jones Industrial Average gained 13.36 points, or 0.04% to close at 34,479.60. Though the Blue Chip index was barely up today, closing in positive territory was nonetheless a welcome sign as the index had dropped three of five trading sessions to close down almost 1% for the week. Gains this week in, among others, Microsoft (MSFT), Salesforce (CRM) and IBM (IBM) helped the Dow recover what might have been steeper declines for the week. Meanwhile, up almost 2% for the week, the Nasdaq Composite Index was the biggest winner, rising 49.09 points Friday to 14,069.42.
The tech-heavy index extended its winning streak to four weeks, driven by strong recovery is work-from-home stocks such as Zoom Video (ZM), CrowdStrike (CRWD) and DocuSign (DOCU), among other strong gainers. Not surprising, however, is the reason for the recent rise in tech stocks. Notably, the 10-year Treasury yield which traded flat on Friday at 1.46% had declined 3 basis points to 1.43 during the session, marking its lowest level since April. What’s more, for the week the 10-year dropped nearly 12 basis, marking its largest weekly decline in almost twelve months.
The fact that the 10-year is now below 1.5% is a strong bullish sign for equities, especially high-growth stocks like technology. As I’ve mentioned in previous posts, after the recent volatility we have seen in tech stocks and the slight pullback over the past three months, the market appears tempted to want to move higher. Factoring the improving employment data which last week dropped the unemployment rate to 5.8% from 6.1%, is also an encouraging sign for stocks.
As I have been saying for a while, all of these factors, when taken together, support what I believe to be encouraging signs that economic recovery in now firmly underway. And with all three major benchmarks back at or near their 50-day moving averages, staying invested in the market is even more appealing, especially for investors who can handle the day-to-day swings as the pent-up demand for re-opening of the economy accelerates.
As for earnings, it's a light week but here are the stocks I’ll be watching this week.
Oracle (ORCL) - Reports after the close, Tuesday, Jun. 15
Wall Street expects Oracle to earn $1.31 per share on revenue of $11.04 billion. This compares to the year-ago quarter when earnings came to $1.20 per share on revenue of $10.44 billion.
What to watch: Oracle shares have surged 37% over the past six months, more than doubling not only the 16% rise in the S&P 500 index, its performance has vastly outperformed the 14.7% rise in the Technology Select Sector SPDR ETF (XLK). Now up 28% year to date and trading near 52-week highs, the database giant must demonstrate its fundamentals can sustain its recent growth rate, especially given the fact that the stock is trading at a premium to its historical valuation. The company is nevertheless seen as a transformation play based on its business transformation towards a cloud subscription-based model in the mode of Microsoft (MSFT) a decade ago. As such, the company’s cloud strategy which is highly focused on customer retention and migrating existing on-premises customers to the cloud, remains a key factor in assessing the stock’s premium potential. In other words, can Oracle effectively compete with incumbents such as Salesforce (CRM), Workday (WDAY) and Amazon (AMZN) and stake a larger share of the cloud market?
Adobe (ADBE) - Reports after the close, Thursday, Jun. 17
Wall Street expects Adobe to earn $2.81 per share on revenue of $3.73 billion. This compares to the year-ago quarter when earnings came to $2.45 per share on revenue of $3.16 billion.
What to watch: Adobe is expected to report a monster quarter, according to multiple Wall Street analysts who cited sustained growth not only from the work-from-home tailwind, but also from what is being described as the secular digitization trend. The company’s product offering is also seen as vastly differentiated from potential competitors. Gregg Moskowitz, analyst at Mizuho, recently initiated coverage on the digital cloud giant with a Buy rating and $600 price target. The company’s "expansive portfolio of software solutions has made it the gold standard in content creation, consumption, and collaboration,” Moskowitz noted. What’s more, Adobe’s profit margins have steadily risen during its transition to a cloud-based subscription services subscription business within both its Digital Media and Digital Experience segments. While the stock is not cheap today, it doesn’t appear as if it will get cheaper given the company’s many growth catalysts.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.