Stocks ended a brutal trading week mostly mixed on Friday. Dip buyers swooped in, looking for bargains which helped the indexes reverse earlier-session losses. But despite the S&P 500 ending the day in positive territory, that wasn’t enough to keep the index out of bear market territory, which occurs when the index falls more than 20% below its 52-week high.
Will stocks rebound soon? Analysts at Bank of America are telling clients not to hold their breath. Citing historical trends, they see a scenario where the S&P 500 and Nasdaq could be at 3,000 and 10,000, respectively, by the end of October. From current levels, that would translate to declines of 23% and 12%, respectively, in the next five months. The S&P ended down about 3% for the week, and, as with the Nasdaq, has now been down for seven consecutive weeks.
Meanwhile, the Dow Jones Industrial Average, which has declined for eight consecutive weeks, can still see further declines in the months ahead as the market adjusts to the current tightening in monetary policy. And economist don’t think the tide will reverse until the tightening cycle ends. When discussing the scenarios for the S&P 500, LPL Financial's Ryan Detrick said, "We forecast it to reach 3,750 by the middle of next year, which would represent a peak-to-trough decline of ~22%, before recovering to 4,250 by the end of 2023.”
The combination of soaring inflation and rising interest rates have increased the likelihood that a recession is imminent. “Are we going to have a recession? It’s pretty likely,” said Larry Harris, the Fred V. Keenan Chair in Finance at the University of Southern California Marshall School of Business and former chief economist of the SEC. “It’s very hard to stop inflation without a recession,” he added according to CNBC.
There is also concern about sustained higher gas prices, an expected byproduct of the Ukraine crisis, which could further hurt consumer spending. Reports suggests that Americans have already begun to scale back on big-ticket spending and leisure activities. This level of budget management will impact retailers in the quarters ahead as consumers eat out less frequently and decide to postpone their travel plans. That said, if Friday’s strong rebound was any indication, dip-buyers are armed and ready to scoop up bargains. Time will tell if they were right. Here are the stocks I’ll be watching this week.
Zoom Video (ZM) - Reports after the close, Monday, May 23
Wall Street expects Zoom to earn 87 cents per share on revenue of $1.07 billion. This compares to the year-ago quarter when earnings came to $1.32 per share on revenue of $956.24 million.
What to watch: Shares of Zoom have been punished mercilessly over the past year, falling some 70% compared to 5% decline for the S&P 500 index. Investors have grown concerned that the video conferencing specialist will struggle to retain its large enterprise customer base in the years ahead. Projecting Zoom's quarterly adjusted earnings per share to decline for the first time in several years, analysts aren’t optimistic, particularly as revenue growth continues to slow. That said, the company has surpassed the Street’s top and bottom line estimate in each quarter over the past two years. Now trading near a 52-week low, investors want to know if there is more downside ahead. In this quarterly report, one key metric to keep an eye on will be the number of Zoom customers contributing over $100,000 in 12-month trailing revenue. Why is that important? That customer tier tend to be more stable, providing Zoom longer-term revenue streams than smaller customers. To reverse the stock’s bearish trend, in addition to growth re-acceleration, Zoom on Monday will have to issue strong revenue and earnings forecast.
Nvidia (NVDA) - Reports after the close, Wednesday, May 25
Wall Street expects Nvidia to earn $1.29 per share on revenue of $8.09 billion. This compares to the year-ago quarter when earnings came to 92 cents per share on revenue of $5.66 billion.
What to watch: The decline in semiconductor stocks continue to worsen, leaving many investors wondering when will the carnage end. On Friday NVDA stock plunged to a six-month low and is now down some 50% year to date. This is even though the company continues to churn out revenue outperformance each quarter, while enduring disruptions in its supply chain. The market, however, is repricing tech valuations. Meanwhile, the recent selloff in cryptocurrencies has scaled back demand for Nvidia’s GPUs which are used in crypto mining. The entire chip industry has also suffered a decline in average selling prices, which analysts believe will impact the company’s gaming revenue and datacenter revenue. Having posted sequential revenue growth in each of its last 12 quarters, the datacenter business is the company’s second-largest growth driver, accounting for roughly 43% of Nvidia’s total revenue last quarter. The market assumes that Q1 datacenter numbers will slow during the quarter and guidance might not be good enough to excite investors. To reverse the stock's decline the company on Wednesday will need to talk positively about its growth prospects for the next quarter and beyond.
Splunk (SPLK) - Reports after the close, Wednesday, May 25
Wall Street expects Splunk to lose 75 cents per share on revenue of $629.73 million. This compares to the year-ago quarter when the loss was 91 cents per share on revenue of $502.05 million.
What to watch: The machine data analytics company hasn’t escaped the wrath of the market selloff despite improving its operating fundamentals in several key areas. The stock has fallen 14% over the past year and it down 16% year to date. And when comparing its share price from its highs in October 2020, investors have lost more than 54%. During that two-year period, the company has grown its revenue by more than 13%. Just as impressive, Splunk’s subscription-focused business model ended its recent fiscal year with free cash flow of $100 million, compared to negative free cash flow of $242 million at the end of 2020. Looking ahead, the company has multiple growth catalysts that should continue to drive revenue higher. Aside from the expanding cybersecurity industry, Splunk’s dashboard visualizations and machine learning capabilities will capture a sizable chunk of software spending from enterprise customers. That said, given that investors have shifted their focus on the company’s valuation, the management team on Wednesday will need to convince a skeptical market that Splunk can continue to reaccelerate its growth rate and capture market share.
Alibaba (BABA) - Reports before the open, Thursday, May 26
Wall Street expects Alibaba to earn $1.07 per share on revenue of $29.73 billion. This compares to the year-ago quarter when earnings came to $1.60 per share on revenue of $29.05 billion.
What to watch: What will it take for Alibaba stock to rebound? Alibaba has been under pressure from issues related to corporate governance and its political standing in China. But ahead of its quarterly results Thursday, investors shouldn’t expect any positive surprises, according to Bank of America analyst Eddie Leung. In a recent note to clients, and referencing the company’s local services and cloud businesses, Leung cautioned that Alibaba could report "moderate deceleration" where both business can fall to 39% and 17% year-over-year growth, respectively. The pandemic-related lockdowns in China was cited as the key reason for his downbeat report. However, when discussing Alibaba’s core China commerce revenue, Leung believes that business could rise almost 10% year over year, driven by increase demand in the early part of the year. The analyst, nonetheless, maintained his Buy rating on BABA stock and a price target of $175. From current levels of around $85, that still represents more than 105% potential upside. But the company must affirm on Thursday that it can realize that level of premium.
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