Thanks to strong earnings results from several blue-chip companies and banks, the stock market has notched record highs. But despite strong June retail sales and the strong start to second-quarter earnings, there’s still some concerns about flagging consumer sentiment. How much higher can stocks go, particularly with valuations seemingly stretched in several sectors? That appears to be what pressured stocks this week, with the Dow Jones Industrial Average on Friday declining 299.17 points, or 0.9%, to close at 34,687.85.
Weakness in blue chips such as Apple (AAPL), Home Depot (HD) and Cisco (CSCO) pressured the Dow. The S&P 500 index lost 32.87 points, or 0.75%, to end the session at 4,327.16, while the tech-heavy Nasdaq Composite shed 115.90 points to finish at 14,427.24. The declines, driven by weak consumers sentiment, snapped a three week winning streak for each of the major averages.
Notably, investors were seemingly unswayed even as Jerome Powell, Fed Chairman, said all of the right things in his attempt to stabilize the market by saying the rise inflation was likely to be temporary. For the week, all three major averages posted declines, led by the Nasdaq which fell 1.9% for the week amid a sizable pullback in tech. The S&P 500 lost 1% for the week, while the Dow declined more moderately 0.5%. To be sure, despite the pullback, stocks aren’t far from record highs.
The market is in a see-saw battle between corporate earnings and the guidance that will be provided versus the potential impact of an increase spread of the coronavirus and possible delay in a global re-opening. But there’s also good news, such as the 0.6% increase in June U.S. retail sales which beat a forecast for a 0.4% decline. That is pretty significant. Plus, when excluding autos, which has suffered due to the chip shortage, retail sales rose 1.3% last month, which is almost three times as much as Wall Street expected. This data suggests the economy is quite strong.
What’s more, it also points to how quickly consumers are getting out of their homes to shop, eat and taking the vacations they were prevented from taking a year ago. And there’s more good news to factor in. Aside from widespread vaccinations across the country, which some analysts forecast will lead to a surge in economic growth, there’s also the infrastructure spending plan proposed by the Biden administration. These catalysts are factored into the the growth expectations not only for the second quarter, but also for the third and fourth quarters as well.
On the earnings front, things are starting to ramp up and here are the ones I'll be watching this week:
IBM (IBM) - Reports after the close, Monday, Jul. 19
Wall Street expects IBM to earn $2.29 per share on revenue of $18.29 billion. This compares to the year-ago quarter when earning were $2.18 per share on $17.72 billion in revenue.
What to watch: IBM has always been a great stock to buy for dividend investors, but has the company become more appealing to growth investors as well? The tech giant has struggled to grow revenues over the past decade and has not benefited in the massive economic expansion that saw cloud leaders such as Amazon (AMZN) and Microsoft (MSFT) produce double-digit revenue gains. But as it transitions away from its legacy businesses, IBM’s turnaround has seemingly begun. The company’s cloud ambitions have shown some promise in recent quarters, and has provided ample revenue strength to support a higher multiple, thanks to the Red Hat acquisition which modernized its cloud business.
The company is now forecasted to grow revenues by high single digits annually over the next 5 years. The stock has rallied from about $115 back in January to near $140, but the stock is facing some key resistance. The market is now, understandably, taking a wait-and-see attitude with Monday’s earnings results.
United Airlines (UAL) - Reports after the close, Tuesday, Jul. 20
Wall Street expects United Airlines to lose $4.23 per share on revenue of $5.25 billion. This compares to the year-ago quarter when the loss was $9.31 per share on revenue of $1.48 billion.
What to watch: Due to slumping booking demand caused by the pandemic, airline stocks have been one of the worst-performing sectors over the past year. But that was before vaccine distribution kicked into high gear. Not only has airline traffic picked up over the past six months, there is optimism that the increased demand will be sustainable through 2022. In anticipation of this, United recently ordered 270 narrow-body planes that will replace the company’s fleet of 50-seat regional jets. This is on top the company’s existing orders that has an estimated price tag of close to $15 billion. The investment is based on the company’s capacity growth forecasts of 5% annually through over the next five years. The question is, with the stock passing the $50 benchmark, will the market assign United a valuation that is commensurate to its growth objective? While the company is arguably better-positioned today than a year ago, like with IBM, investors are taking a wait-and-see approach before piling in more cash.
Netflix (NFLX) - Reports after the close, Tuesday, Jul. 20
Wall Street expects Netflix to earn $3.15 per share on revenue of $7.32 billion. This compares to the year-ago quarter when earnings were $1.59 per share on $6.08 billion in revenue.
What to watch: Despite the emergence of rival streamers such as Disney+ (DIS), HBO Max (T) and Apple TV+ (AAPL), Netflix has figured out ways to maintain its status as the king of streaming. The company has been willing to consistently re-evaluate its market position and approach to remain competitive. One recent example is negotiated a deal with Sony (SONY) that now allows Netflix not only to receive more content sooner than their previous deal, it also also opens the door for both companies to delve into new partnerships. Netflix stock has responded favorably, rising 10% over the past month, besting the 2.7% rise in the S&P 500 index. But Morgan Stanley analyst Benjamin Swinburne, despite maintaining an Overweight rating on the stock, last week highlighted some risks for Netflix, suggesting that estimates for both Q2 and Q3 might be too bullish. Swinburne seen an increase in net subscribers to come in Q4 and for 2022 as the new content accelerates. As is often the case, how the company guides for the next quarter and full year will answer the important question of what direction the stock takes.
Intel (INTC) - Reports after the close, Thursday, Jul. 22
Wall Street expects Intel to earn $1.06 per share on revenue of $17.84 billion. This compares to the year-ago quarter when earnings were $1.23 per share on revenue of $19.73 billion.
What to watch: Which version of Intel will the market see on Thursday? Shares of the chip giant has fallen 3% over the past six months, compared to 16% rise in the S&P 500 index. The stock is down more than 14% since the company reported its Q1 results. While Intel has surpassed the Street’s revenue estimates in nine straight quarters, investors have grown frustrated about the company’s lack of progress in key business segments, particularly in its datacenter group and client computing group, which accounts for 28.3% and 53.9% of the company’s Q1 revenue, respectively. Weaknesses in these areas for Intel have been magnified by the successes and market share gains from rivals AMD (AMD) and Nvidia (NVDA) in several important chip developments. While new CEO Pat Gelsinger has done a decent job changing the negative narrative surrounding the company, Intel on Thursday must prove the naysayers wrong, while selling the upside potential of the many growth initiatives it can still achieve.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.