When deciding whether to be fully invested in the stock market, or whether to enter the market at all, many investors are trying to anticipate the Federal Reserve’s next move regarding interest rates. Another factor is the health of the U.S. economy amid rising inflation and struggles with regional banks.
"Markets failed to race away yesterday, as renewed fears of a slowdown led to a decent risk-off move, with investors growing concerned about weak data releases, the U.S. debt ceiling, as well as the ongoing situation with regional banks," Deutsche Bank's Jim Reid said. All of the issues tend to have a corrosive effect on investor sentiment. The choppiness witnessed this week in the stock market, where it appears stocks lacked direction and conviction, suggests investors are still on the fence about the ultimate direction.
Recent economic data showed that University of Michigan’s consumer sentiment index fell to a six-month low of 57.7 for may. This compares to expectations of a reading of 63.0. Meanwhile, according a recent survey, inflation is expected to climb to 3.2% over the next 5 years. This would tie the highest mark in fifteen years. In other words, the concerns about inflation and what the Fed will do to fight the rising cost of living will be here for some time.
These collective issues sent the Dow Jones Industrial Average on Friday lower by 8.89 points, or 0.03%, to close at 33,300.62. The blue chip index posted its second conceptive week of declines. Leading the decline on the Dow were, among others, Apple (AAPL), Salesforce (CRM) and Microsoft (MSFT). The S&P 500 index, which also suffered its second conceptive week of declines, fell 0.16%, or 6.53 points to end the day at 4,124.09, while the tech-heavy Nasdaq Composite decline 0.35%, giving up 43.76 points to close at 12,284.74.
The decline in the S&P 500 was driven by decline in regional banks which send the SPDR S&P Regional Banking ETF (KRE) lower by 0.4%. While inflation concerns remain high, the market believes the period of interest rate increases are over. According to the CME FedWatch tool, the market is placing a 93% probability that there will be no hike at the central bank's June meeting. To be sure, the broad consensus among Wall Street analysts is that the Fed will hike rates by another 25 basis points, as it did at its last policy meeting.
However, the sense that there won’t be any increase at all continues to climb. What’s more, the labor market remains strong, with the unemployment rate hovering near 3% even as the inflation is on the rise. All of these are positive signs for what's ahead. Will that trend continue this week?
On the earnings front, here are the stocks I’ll be watching.
Cisco (CSCO) - Reports after the close, Wednesday, May 17
Wall Street expects Cisco to earn 97 cents per share on revenue of $14.39 billion. This compares to the year-ago quarter when earnings came to 87 cents per share on revenue of $12.84 billion.
What to watch: Cisco might produce network equipment that customers can rely on, but investors aren’t so sure that reliance is worth the current stock price. The network equipment maker has seen its stock decline more than 8% over the past month, while falling 3.7% year to date. This compares with a 7.6% rise in the S&P 500 Index. The stock has fallen 4.6% over the past year, while the S&P 500 has risen 5%. That said, Cisco’s stock performance does not accurately reflect the qualities of the company and its leadership. The company's focus on future growth, namely mergers and acquisitions while executing stock buybacks, is another reason to be patient here. The subscriptions segment now accounts for 44% of total revenue, while recurring revenues are up 6% year over year. This means the company no longer relies its legacy hardware business of selling physical routers and switches. Thanks to its new enduring business model, the company has more than $20 billion in excess cash on its balance sheet, reflecting about 10% of its current market cap. This amount of cash gives Cisco the option to return it to shareholder in the form of share buybacks and dividends. Cisco offers an attractive dividend which yields 3.35%, compared to the 2% yield of the S&P 500 Index. From a valuation perspective, the current P/E (price to earnings) ratio stands at 12.4 when considering the EPS forecasts for 2023. Given the company’s strong fundamentals, paying just 12 times earnings makes sense, especially when factoring Cisco’s significant free cash flow. But for any of that to matter, the company on Wednesday must show consistent growth in its pivot towards software and subscription businesses as it scales down the legacy hardware segments.
Alibaba (BABA) - Reports before the open, Thursday, May 18
Wall Street expects Alibaba to earn $1.35 per share on revenue of $30.28 billion. This compares to the year-ago quarter when earnings came to $1.18 per share on revenue of $28.35 billion.
What to watch: With 24% returns over the past six months, there appears to be renewed optimism that Alibaba can return to its glory days. Currently trading at around $85, BABA stock has risen close to 50% from its low of $58. With China opening and relaxing its zero-COVID policy, investors want to know whether Alibaba’s recent gains are not only sustainable, but also whether room for more upside is realistic. A recovering Chinese economy could be a major boon for BABA stock. That said, China’s leading e-commerce and cloud services provider is still a shell of its former self. The stock is down more than 70% from its previous highs, driven by intense round of regulatory scrutiny of big tech platforms in China. These headwinds appear to be fading and now could be an ideal time to bet on a long-term recovery, particularly given Alibaba’s treasure chest of $55 billion of cash and its consistently strong cash flows. The company’s diversified revenue sources within the country, along with its cloud potential presents tons of value at current levels. Alibaba recently announced plans to invest $1 billion over the next three years to boost its cloud prowess. Although the cloud is currently a small portion of Alibaba’s overall business, currently, the management has begun to prioritize it as a crucial piece towards long-term growth and profitability. On Thursday the stock can continue its climb if Alibaba can deliver a top- and bottom-line beat and provide confidence outlook for the next quarter and full year.
Walmart (WMT) - Reports before the open, Thursday, May 18
Wall Street expects Walmart to earn $1.19 per share on revenue of $135.23 billion. This compares to the year-ago quarter when earnings came to $1.30 per share on revenue of $141.57 billion.
What to watch: Retailers have struggled over the past several months amid rising inflation and rising interest rates which have adverse impacts on consumer spending. The likelihood of a recession is another reason for concern when investing in retail given the fear that consumers will spend less. Although Walmart’s low-cost leadership has branded it as “recession proof,” the company still faces some macro risks. In the most-recent quarter, its gross margins declined 83 basis points to 22.9%. For the full year, the company posted a 5% decline in adjusted operating earnings to $24.7 billion. This is due to operating margins being down to 4.0% as GAAP operating profits fell to $20 billion. Overall, adjusted earnings for 2022 were down 17 cents per share from the prior year. However, in 2023 things are looking much brighter. For Q1, the company is projecting revenue growth of 4.5% to 5%, powered by inflation. Operating income is projected to increase 3.5% to 4%. This explains why the stock is up 8% year to date, compared to a 7.6% rise in the S&P 500 index. Some investors are betting that higher inflation could drive more revenue to Walmart. The company’s hybrid model of brick-and-mortar retail and e-commerce has given Walmart an advantage over its rivals. And the current environment enables Walmart’s e-commerce growth to accelerate in the future. The company on Thursday will need to talk positively about these growth prospects and the macro impact on its customers.
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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