A strong jobs report and the passing of the debt ceiling bill that prevented a U.S. default sent stocks soaring on Friday. Investors also placed massive bets that the Federal Reserve will pause their rate hike at their meeting later this month. The collective optimism helped the Dow Jones Industrial Average to log its best day of the year Friday, and the Nasdaq advanced reached its highest level in more than year.
The question is, can these gains hold? That’s hard to bet against given the level of resilience in the U.S. economy. On Friday the Labor Department reported May non-farm payrolls surged more than expected. Despite multiple challenges, 339,000 jobs were added for the month of May, topping the 190,000 estimate. This also marked the 29th straight month of positive job growth. Despite the jobs beat, however, the unemployment rate ticked up to 3.7% from a prior reading of 3.4%.
Average hourly earnings, a key inflation indicator, climbed 0.3% for in May, matching economist expectations. Meanwhile, on a year-over-year basis, there was a rise of 4.3% in wages, which missed estimates by 10 basis points. Notably, the unemployment rate ticked up even as the labor force participation rate was unchanged. What’s more, the jobless rate came in at the highest since October 2022, although it is still near lows of fifty years ago.
There was also a decline in average weekly hours worked which came to 34.3, from 34.4. All of this played into the the rally in stocks on Friday as investors are now betting that the Fed will be less inclined to raise rates with uptick in the unemployment rate. The Dow on Friday rose 701.19 points, or 2.12%, to end Friday’s session at 33,762.76. The S&P 500 gained 61.35 points, or 1.45%, to finish at 4,282.37. The tech heavy Nasdaq Composite jumped 139.78 points, or 1.07%, to end at 13,240.77.
Just how impressive has the Nasdaq been? With its 2% gain for the week, driven by an 11% gain in Tesla (TSLA), among others, the Nasdaq just completed its sixth consecutive week of gains. You would have to go back three years since to find the last time it achieved this streak. Aside from Tesla, Nvidia (NVDA), which has soared 172% this year, has helped the Nasdaq to outpace the S&P 500 and Dow Jones Industrial Average so far in 2023.
But then again, during the bear market of 2022, the Nasdaq was the most punished among the three major averages. So, even with its current streak, the index is just catching up essentially to the Dow and S&P 500. So, what’s next? As I said last week, stocks no longer appear cheap. But staying invested remains the best strategy to counter inflation. The main question remains what will the Federal Reserve do regarding interest rates?
On the earnings front, here are the stocks I’ll be watching this week.
GameStop (GME) - Reports after the close, Wednesday, Jun. 7
Wall Street expects GameStop to post a per-share loss of 12 cents on revenue of $1.36 billion. This compares to the year-ago quarter when the loss was 52 cents per share on revenue of $1.38 billion.
What to watch: Meme stock mania hasn’t taken off like it did a year ago, but GameStop remains one of the most widely followed stocks on the market. The stock has risen 27% year to date, besting the 8% rise in the S&P 500 index. Much of those gains have come over the past thirty days with shares rising some 23%. Currently trading at around $23 per share, the stock is off some 52% from its 52-week high of around $48. The video game retailer has shown some solid fundamentals, demonstrating positive cash flow and an overall strong financial standing. The company last quarter reported a surprise profit even as it continues to struggle to grow revenue. What’s more, U.S. video game sales fell year-over-year for the second straight month in April. Overall video game sales fell 5% to $4.12 billion in April, compared to March's sales of $4.32 billion. As it stands, video game sales are down 2% on a year-to-date basis. Modest gains in console sales weren’t enough to offset a broader decline. This trend, if it continues, is likely to impact GameStop’s performance going forward. The company is projected to generate roughly $6 billion in revenue for the fiscal year. The gross margins, currently at around 25%, will need to move much higher in order to maintain profitability. To date, the management has done a solid job cutting costs. This will need to continue if the video game sales continue to decline. However, the collectibles category has been a bright spot with revenue rising 14% year over year in the Q4. On Wednesday GameStop will need to build on its Q4 success and show it is playing for keeps.
Nio Limited (NIO) - Before the open, Friday, Jun. 9
Wall Street expects Nio to report a per-share loss of 41 cents on revenue of $1.68 billion. This compares to the year-ago quarter when it reported a per-share loss of 17 cents on revenue of $1.48 billion.
What to watch: Shares of Chinese electrical vehicle (EV) company Nio have been punished over the past six months, falling close to 40%, compared to a 3.5% rise in the S&P 500 index. The company recently reported its May delivery numbers that reveled just over 6,155 vehicles. Not only was that total the lowest figure in Nio delivered in almost a year, it also marked an 8% sequential decline and a 12% year over year decline. There were questions at the start of the year as to whether Nio had reached the low point of the decline, but that hasn’t been the case. But there are still several reasons to be optimistic given that the company operates in a high growth region such as China, which recently ranked as the second fastest-growing EV market in sales. After nearly doubling in 2022 with an 87% year over year growth, China alone accounts for close to 60% of global EV sales volume. As it stands, EVs now account for roughly a quarter of all vehicles sold in China. So, it’s possible that Nio has (this time) reached the low point of its delivery decline, making the growth picture more favorable from this point forward. What’s more, the company continues to ramp up additional production capacity. The major question is whether there will be significant demand to meet the production ramp. Its management forecasts a 90% rise in fiscal 2023 revenue, driven by higher volumes. The company on Friday can make a strong case for its value by delivering a top- and bottom line beat, along with strong delivery guidance for the next quarter and full year.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.