In the wake of the Federal Reserve opting to keep interest rates unchanged, the Dow Jones Industrial Average is on track to log its bets weekly gain in 2024. Citing persistent job gains which remains strong, along with low unemployment, the central bank's key federal funds interest rate remains at 5.5% for March.
As it stands, the current federal funds interest rate has been in place since July of last year, and has sparked a recent increase in the cost of borrowing. And that’s the Fed’s goal, making it more expensive to borrow money, hoping that inflation will fall to a desirable 2% level because people and businesses will spend less. The committee, however, affirmed that it plans to cut rates at least three times in 2024, despite noting that it needs more confidence that inflation, currently at 3.2%, is on a sustained track toward its preferred 2% goal.
And if judging by the market’s reaction the past two days, investors have broadly applauded the Fed’s actions. The Dow Jones Industrial Average declined 305.47 points, or 0.77%, to close at 39,475.90. An 8% decline in Nike (NKE) on disappointing guidance and slowing China sales pressured the blue-chip index, and offset the 8% rise in FedEx (FDX) as investors applauded the company after it reported adjusted earnings that beat analyst estimates. The S&P 500 Index lost 7.35 points, or 0.14%, to close at 5,234.18.
The tech-heavy Nasdaq Composite rose 26.98 points, or 0.16%, to end the session at 16,428.82. The Nasdaq was powered by gains in Apple (AAPL) and Google parent Alphabet (GOOG, GOOGL) which rose 2.15% on Friday, after investment firm Wedbush added the search giant to its ‘Best Ideas List’ on what it referred to as “clear” confidence of its AI capabilities.
“We believe the perceived structural risks to Google Search are overstated and continue to view Alphabet as a net beneficiary of generative AI,” analyst Scott Devitt wrote in a note.
Devitt, who has an Outperform rating on GOOG stock, raised its price target by $15 to $175, saying the company has an “unmatched breadth of data” to develop and train AI models, as well as AI-optimized compute infrastructure and a proven history of effective monetization. From current levels, Google shares, which have risen 8% year to date, could rise another 20%. In terms of the broader market, on a weekly basis, the Dow finished just shy of a 2% gain, while the S&P 500 and Nasdaq rose 2.9% and 2.4%, respectively.
“The Fed’s reiteration of monetary easing plans despite expectations of a hotter macro backdrop predictably ushered in another wave of ‘risk-on’ trading,” Wells Fargo analyst Christopher Harvey wrote in a note Friday. “We think this upward bias to equity prices will persist in the near term.” Notably, on Thursday after the Fed meeting concluded, all three major averages closed at record levels, and hit all-time intraday highs. Despite Friday’s somewhat muted action, the overall market trend is still positive, particularly given the breakout of to new all-time highs. Here are the earnings I’ll be watching.
GameStop (GME) - Reports after the close, Tuesday, Mar. 26
Wall Street expects GameStop to earn 29 cents per share on revenue of $2.05 billion. This compares to the year-ago quarter when earnings were 16 cents per share on revenue of $2.23 billion.
What to watch: Meme stock darling GameStop remains one of the most widely-followed stocks on the market, but the video game retailer has not performed this year as investors hoped it would. Currently trading at around $13 per share, the stock is off some 46% from its 52-week high of around $27. The shares have fallen 22% year-to-date, including 20% over the past six months, trailing the 10% year-to-date rise in the S&P 500 index. Meanwhile, over the trailing twelve months, GME stock has fallen 23%, while the S&P 500 has risen 31%.
On the positive side, the company has made significant improvements to its balance sheet and dramatically slowed its cash burn rate through aggressive cost cuts. While these improvements potentially allows it to transition to more effective business models, the retailer is still facing significant challenges in its fundamental prospects, and nor does it improve its long-term profit potential.
The main challenge it faces is weakness in its core business of trading physical video games, which has suffered a steady decline due to the digitalization of the gaming industry, which is now dominated by online sales, particularly with the rise of Microsoft's (MSFT) cloud gaming platform. To be sure, GameStop management has attempted to diversify the company’s revenue stream. However, there has been no signs of meaningful improvement, including in the collectibles segment, which accounts for 16% of annual revenue.
With Q3 segment revenue coming in at around $177 million, that figure, despite being a higher margin, still fell around 15% year over year. As such, this makes GameStop still highly reliant on hardware revenue which remains both cyclical and and highly risked to competitive pressures. On Wednesday GameStop will need to outline its long-term plan and demonstrate it has lasting power.
BlackBerry (BB) - Reports after the close, Wednesday, Mar. 27
Wall Street expects BlackBerry to lose 3 cents per share on revenue of $154.59 million. This compares to the year-ago quarter when the loss was 2 cents per share on revenue of $151 million.
What to watch: What is it going to take to finally get BlackBerry moving in the right direction? The shares have fallen 22% year to date, including a 46% decline in the past six months, compared to gains of 10% and 21% in the S&P 500 index in both spans, respectively. Just this past week alone BlackBerry stock has fallen more than 10%. And when expanding that horizon by one year and three years, the shares have fallen 27% and 75%, respectively.
Once the leading brand for mobile messaging device for enterprises and consumers, BlackBerry has attempted to shift its business to become an Internet of Things and cybersecurity software specialist. However, that transition has yet to pay off and the company has displayed minimal-to-no growth in these segments for almost a decade. In the most recent quarter, segment revenues rose a modest $8 million on a $106 million base, while consolidated revenues were only up $6 million to $175 million.
This is despite the management touting Cybersecurity opportunity for secure connectivity. The company appointed John Gamatteo, formerly Cybersecurity President, to become CEO on December 11. The hope is that under his new leadership BlackBerry can be re-energize and the various businesses can return to sustainable growth. This comes as it also raises new debt through a private offering, hoping to find a successful business model. Wall Street analysts are nonetheless skeptical and have been busy slashing their projections ahead of Wednesday’s release. Nevertheless, with BlackBerry stock still down some 70% over the past five years, one quarter of any sort of improvement won’t change the narrative to justify a higher price.
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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