Despite prolonged concerns regarding inflation and the overall rising cost of living, the consumer remains upbeat about the current state of the economy and the outlook for the rest of the year. Just how strong is the consumer? Strong second quarter earnings results and guidance from some of the world's largest banks such as JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) suggests the consumer is in a far better shape than economists expected.
Entering this year, there were many predictions about the impact inflationary pressures would have on the economy and potentially a recession. In the case of JPMorgan, which delivered a double beat, CEO Jamie Dimon was very optimistic. “The U.S. economy continues to be resilient,” Dimon said in the earnings release. “Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly. Labor markets have softened somewhat, but job growth remains strong.”
Easing U.S. inflation, which we have seen for several months, has also been part of the narrative. Last week not only did monthly PPI came in at just +0.1%, the previous month was revised lower by a tenth to -0.4%. The positive news on the inflation continues fuel the investor's appetite for stocks on the belief that the Federal Reserve is nearing its rate hike cycle, even though the Fed has signaled their intent to hike rates on two more occasions, starting at this month’s policy meeting. There is also a belief that the Fed may begin cutting rates sometime in the end of Q3 or at some point in Q4.
Not surprisingly the market reacted favorably on Friday with the Dow Jones Industrial Average rising 113.89 points, or 0.33%, to close at 34,509.03. Leading the Dow were, among others, Apple (AAPL), Microsoft (MSFT), Home Depot (HD), and with a more than 7% jump, UnitedHealth (UNH). The S&P 500 Index ended down 4.62 points, or 0.10%, to close at 4,505.42, while the tech-heavy Nasdaq Composite declined 24.87 points, or 0.18%, to close at 14,113.70. Investors have been worried about overbought conditions and high valuations, particularly within some hot names in technology such as magnificent seven cohorts.
Names such as Apple, Amazon (AMZN), Google parent Alphabet (GOOG , GOOGL), Meta Platforms (META), Microsoft, Nvidia (NVDA) and Tesla (TSLA) have enjoyed tremendous gains driven by excitement in artificial intelligence. Whether their winning streak continues will depend on the earnings results they release in the next few weeks. Entering the quarter, earnings estimates have been raised, suggesting renewed optimism of what they are likely to deliver. But you won’t have to wait for long. Tesla is one of several names to keep an eye on for this coming week.
Netflix (NFLX) - Reports after the close, Wednesday, Jul. 19
Wall Street expects Netflix to earn $2.84 per share on revenue of $8.28 billion. This compares to the year-ago quarter when earnings were $3.20 per share on $7.97 billion in revenue.
What to watch: Netflix stock has been one of the better performing names in large-cap tech, rising almost 60% year to date, including a 35% boost in the past six months, besting the 13% rise in the S&P 500 index. With its shares surging 155% in just twelve months, the market appears to be all in on the streaming giant’s growth momentum. Investors who are on the sidelines may be asking if there is still a buying opportunity. Citing "positive data" on the company's paid sharing initiatives, UBS analyst John Hodulik boosted his estimates on Netflix, saying not only does he expect accelerating second-half growth, he now expects Netflix’s Q2 results to come in above management's guidance for revenue and profits. In the second and third-quarters, Hodulik now expects the company to add 3.6 million and 6.5 million paid subscribers, respectively. That’s up from prior estimates of 1.4 million and 3.6 million, respectively. While forecasting Netflix’s Q3 guidance to imply faster revenue and operating income growth, the analyst boosted his 12-month price target from $390 to $525 per share. All told, the company’s growth initiatives, including efforts to grow its ad-supported tier and implementing ways to crackdown on password sharing, are paying huge dividends. Combined with the company’s upcoming content launches, there is a compelling case to remain invested in Netflix stock. These assumptions will be answered when Netflix issues its guidance forecast for the next quarter and full year.
IBM (IBM) - Reports after the close, Wednesday, Jul. 19
Wall Street expects IBM to earn $2.01 per share on revenue of $15.77 billion. This compares to the year-ago quarter when earning were $2.31 per share on $15.54 billion in revenue.
What to watch: Shares of IBM have been one of the more disappointing names in tech, grossly underperforming the market. The stock has fallen 5% year to date, compared with the 17% rise in the S&P 500 index. Over the past six months, the Dow component has lost 8% of its value, while the S&P 500 index has risen close to 13%. While IBM, when factoring its 5.1% yield, offers tons of value, investors are still waiting for the company’s transformation to produce sustainable revenue results. Bank of America analyst Wamsi Mohan said any updates on second-half of the year could bode well for the company. Mohan recently reiterated his Buy rating on the stock with a 12-month price target of $152. "We expect shares of IBM to outperform in a weaker macro backdrop on an improving fundamental story," Mohan wrote in a note. From current levels, that suggests potential premiums of almost 15%. Aside from potential positives such as better-than-expected revenue growth, the analyst believes IBM could benefit from both foreign exchange tailwinds and improvements in margins and free cash flow. There’s also potential AI benefits from its launch of WatsonX. Nevertheless, making a judgement call on IBM can seem frustrating given that the company has been in a perpetual transformation cycle, struggling to grow revenues over the past decade. For the shares to show more signs of life, beyond the appeal of the dividend yield, the company on Wednesday will need to demonstrate continued operating leverage and revenue growth acceleration.
Tesla (TSLA) - Reports after the close, Wednesday, Jul. 19
Wall Street expects Tesla to earn 81 cents per share on revenue of $24.53 billion. This compares to the year-ago quarter when earnings came to 76 cents per share on revenue of $16.93 billion.
What to watch: Without question Tesla stock has been in overdrive for much of 2023. Its shares have skyrocketed 125% year to date, just absolutely crushing the 17% rise in the S&P 500 index. Just as impressive, since reaching a 52-week low of around $101, TSLA stock has risen almost three-fold, surging more than 180% to $284 on July 3. The electric vehicle giant is benefiting from both record vehicle production and deliveries, growing its total Q2 deliveries by 83% year over year to 466,140 vehicles. Not only did Tesla’s Q2 delivery total crush analysts' estimates, it was the company’s largest delivery beat in almost two years. And there’s potentially more gains on the horizon. The company last month announced a deal with General Motors (GM) to allow drivers to use 12,000 Tesla superchargers via an adapter starting next year. Tesla's charging port, which is on the North American Charging Standard (NACS) connector, will work for GM electric vehicles starting in 2025. The partnership with GM follows a similar deal with Ford Motor (F). This new deal prompted Wedbush analyst Daniel Ives, a longtime Tesla bull, to tweet, "Game, set, match.” Ives, who boosted his rating on the stock to Outperform, added "Musk playing chess while others playing checkers”. Adding, "Tesla just cornered the market," Ives added, discussing the North American EV charging systems. While putting the company back on his Best Ideas list, Ives said, Wall Street will start to “better recognize the underlying value in the Tesla EV ecosystem into 2024 and beyond.” The analyst boosted his price target on Tesla stock to $300, up from $215.
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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