Stocks ended Friday’s trading session mostly mixed, despite a stronger-than-expected June jobs report. Investors once again seem focused on rising inflation and rising interest rates, which is often a recipe for a recession. But despite the negative close in the both the Dow and S&P 500, all three major averages posted weekly gains. That fact alone is reason for optimism.
While investors are correct to be fearful of a recession, another encouraging reason for optimisms is the sustained growth in labor market, which is typically a lagging indicator of where the economy truly is. Friday’s jobs report revealed that 372,000 new jobs were created in June. On a month-to-month basis, the number is modestly slower, but it is significantly higher than the 250,000 forecasted by economists.
The report also revealed a 0.3% rise in average hourly earnings in June, which is a slight dip from the 0.4% in May. The modest slowdown in wage growth can be seen as an encouraging sign that a recession — if one were to come — may not be as pronounced. That said, some indicators suggest a recession is already here, even though jobs demand is still strong. On Friday the Dow Jones Industrial Average gave up 46.40 points, or 0.15%, to close at 31,338.15.
The S&P 500 index lost 3.24 points, or 0.08% to end at 3,899.38, while the tech-heavy Nasdaq Composite added 13.96 points points, or 0.12%, to end at 11,635.31. For the week, all three major stocks benchmarks posted weekly gains, with the Nasdaq leading the way for a gain of close to 5%. The Dow added 1.2% and the S&P 500 — which had four consecutive positive closing sessions — gained 2.1%. Some investors are attributing the recent rally, especially in growth stocks, as a sign that the Federal Reserve may be less hawkish in the months ahead as it attempts to tame inflation.
It remains to be seen if the rally continues. But with the S&P 500 is down more than 18% since the start of the year, and still searching for a bottom, this could be a buying opportunity as the second-quarter earnings reports are due in the coming weeks. As such, investors are seemingly working to re-add risk, focusing on big-cap stocks with strong balance sheets that have been punished. Here are the earnings I’ll be watching this week.
PepsiCo (PEP) - Reports before the open, Monday, Jul. 11
Wall Street expects PepsiCo to deliver EPS of $1.74 per share on revenue of $19.49 billion. This compares to the year-ago quarter when earnings were $1.72 per share on $19.22 billion in revenue.
What to watch: Consumer defensive stocks have been the safe havens investors have rushed into during the market correction which has punished high-growth stocks in technology. One the names that has caught my attention is PepsiCo. Although shares of the snack and beverage giant has declined about 2% year to date, it has significantly outperformed the 19% drop in the S&P 500 index. What’s more, the stock is still up more than 14% over the past year, while the S&P 500 has declined 11%. That outperformance is poised to continue based on Q2 non-alcoholic beverage sales data which showed Pepsi with an almost 13% gain during the quarter. The company’s investments in new brands and adapting to new trends has begun to pay dividends evidenced by the 6% rise in organic revenue growth in the first quarter, during which organic revenue rose 13% in North America and 14% higher for Frito-Lay North America. Volume was also 6% higher for beverages. The company still believes that there is plenty of room for growth in its core snacks and beverages business. On Monday Pepsi will need to demonstrate that growth.
Delta Airlines (DAL) - Reports before the open, Wednesday, Jul. 13
Wall Street expects Delta to lose $1.65 per share on revenue of $13.58 billion. This compares to the year-ago quarter when the loss came to $1.07 per share on $7.13 billion in revenue.
What to watch: Airline stocks have been under pressure of late, driven by massive jump in flight cancelations during the 4th of July holiday which is typically one of the busiest travel times of the year. But that issue alone should not disrupt the opportunity that currently exists in Delta Airlines which is set to generate up to $1.7 billion in operating income with margins of 13% to 14%. The airline recently said that it now expects strong results for the second quarter, with adjusted total revenue “fully restored to 2019” levels. “Total unit revenues are expected to be 7 to 8 points better than initially expected on capacity that is 1 to 2 points lower than planned,” the update stated. Demand for leisure travel is also quickly on the rise. “Unit revenue improvement is being driven by broad-based demand and pricing strength across consumer, business and international travel, with improvement through the quarter,” the airline added. As such, Delta’s profit margin is poised to recover to pre-pandemic levels. Meanwhile, Delta stock currently trades at a P/E multiple of 6.6 times 2023 estimates which is significantly below its historical levels, and making it one of the better bargains in transportation stocks.
JPMorgan Chase (JPM) - Reports before the open, Thursday, Jul. 14
Wall Street expects JPMorgan to earn $2.95 per share on revenue of $31.96 billion. This compares to the year-ago quarter when earnings came to $3.78 per share on revenue of $29.96 billion.
What to watch: Despite the prospects of rising interest rates, shares of JPMorgan Chase have gotten punished over the past seven months. And that’s because interest rates are not the only metrics investors are watching. Earlier this year, the yield curve inverted, which typically indicates a recession is on the horizon. Inflation is also an issue which has already caused a noticeable slowdown in several areas of the economy. As such, the stock has fallen 29% year to date and 27% over the past year. Just the past thirty days, the share have given up almost 15%. However, these issues aren’t new. And JPMorgan Chase, the largest bank in the world by market cap, has shown it can navigate these tough headwinds to return value to shareholders. At the current valuation, JPMorgan stock is priced at a forward P/E ration of 9.5 which is below its five-year and ten-year average go 12.5 and 11.4, respectively. In other words, the market has become too bearish. The management team has a solid reputation for execution and capital deployment. Combined with its 2.50% dividend yield, which has grown at an average of almost 8% over the last five years, JPMorgan looks like a solid opportunity ahead of earnings.
Wells Fargo (WFC) - Reports before the open, Friday, Jul. 15
Wall Street expects Wells Fargo to earn 91 cents per share on revenue of $17.73 billion. This compares to the year-ago quarter when earnings were $1.38 per share on revenue of $20.27 billion.
What to watch: Rising interest rate environments, which the Fed has now raised on multiple occasions, are typically good for bank stock. That’s because the profits the banks earn is highly correlated to how they invest deposits versus the interest they pay consumers on those deposits which is called the spread. However, the prospects of higher interest rates alone has not prevented Wells Fargo stock from falling with the overall market. Currently down 17% year to date, with a 9% decline over the past year, WFC stock has fallen more than 30% from its 52-week highs. This decline has created what I think is a prime buying opportunity. Aside from the fact that the bank recently passed the Fed’s stress test, and raised its quarterly dividend 20%, it seems that the market is discounting Wells Fargo’s tangible book value relative to its peer group which boast fewer deposits and loans. What’s more, the bank also has $20 billion worth of buybacks to execute over the next twelve months, thanks to its much stronger balance sheet due to the bank’s cost-saving initiatives. Having overcome its legacy issues, Wells Fargo seems ready to look ahead and execute on its growth objectives.
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.
Read Richard's Bio