The long-anticipated Federal Reserve rate hike announced last Thursday led the market into a short sharp rally. Investors applauded the 75 basis point increase in the target Fed Funds rate as the Fed made clear they were getting tough on inflation, but not too tough.
Some earlier speculation of a full 100 basis point increase, along with continued high inflation rates and now yet another quarter of negative GDP growth, led many to speculate that the economy would be in full-blown recession before year-end.
The market focused on some key phrases in the press conference given by Fed Chair Jerome Powell,. The message translated along the lines that the Fed was taking the bull by the horns, inflation will be beaten, and there is light at the end of the tunnel. He also cited that the labor market is consistently proving to be the strongest in decades, with an unemployment rate at a rock bottom 3.6%.
Friday’s rally across the board led to the best performing month on the S&P 500 in nearly two years by increasing some 11%. Amazon alone was up by 27% on higher than expected earnings, despite trimming headcount by nearly 100,000 in Q2. The last double-digit monthly rally was when the Covid vaccine announcement in November 2020 pushed the market up by 11%.
Beyond renewed confidence in the Fed’s decisive action and the solid employment market, in corporate America, the big are getting bigger. The key drivers to great rallies of the past – such as Apple, Amazon, Alphabet, and Microsoft – all met or slightly exceeded analyst estimates in their earnings released last week. Out of 278 companies in the S&P 500 to report Q2 earnings so far, 209 have met or beaten analyst expectations.
Notably absent from the party was Meta. Despite being pushed by huge tailwinds, Meta stock continues to slide. With many tech giants nearing their 52-week high, Meta is headed towards a 52-week low and now trading at levels actually lower than prices in mid-2017.
There are certainly mixed signals ahead. For example, Walmart, one of the most widely followed consumer bellwether stocks, said in their quarterly earnings call that shoppers across the nation are tightening their belts and cutting spending due to higher prices for gas and food. Although Walmart stock tanked by 8% on the announcement, it soon rallied back and ended the week unchanged.
Whether last month’s rally was finally a signal of a market bottom and the beginning of a bounce back – or a bear market bounce – will depend on how many analysts revise down their estimates for the year.
Play of the Week
On the back of a string of solid earnings announcements, the LevelFields platform reported a whopping 54 companies increasing their dividend with an average event impact of +1.12%.
- On the top of the leader-board was Wingstop, Inc. (WING), which rose over 20% on the announcement of an 11% increase in their dividend.
Wingstop, Inc. (WING): Stock rallies on news of increased dividend.
Similarly, The Charles Schwab Corporation announced both a 10% increase in dividend as well as an increase in their share repurchase program to $15 billion.
- Market volatility, either up or down, is almost always a strong profit driver for financial service firms.
Charles Schwab: Increased dividend and stock repurchases drives price
In addition to dividend increases, 41 companies also announced a cash return to shareholders through stock buyback programs with an average event impact of +3.43%.
- Chipotle Mexican Grill, Inc. (CMG) saw its stock rise by nearly 15% on the news of an increase in stock repurchases following a strong quarter of increased revenues and a 40.2% growth in earnings.
Chipotle: Hot Food and Hotter Earnings
Did You Miss?
The activist investment management fund Elliot Management Corp. again hit the news last week by taking a sizeable stake in PayPal. The exact value of Elliot’s holdings was not disclosed, but it will be of the largest targets taken on by one of Wall Street’s most aggressive activist investment funds. PayPal stock rose 12% on the news.
Last August, PayPal hit a peak market cap of $350 billion, coming off of a huge uptick in eCommerce-related earnings. Yet, since then, the stock has fallen around 60% so far this year in the face of a slowdown in consumer spending on internet purchases in comparison to the shop-at-home mandate of the pandemic period.
Elliot, an aggressive value-oriented investor, sees that PayPal may prove an ideal target. The pioneer in the payments industry founded by Elon Musk holds little debt, $8 billion in cash, and dominant market share and pricing power in the payments industry.
- For a bottom fishing tech investor, PayPal presents definite upside potential with a solid track record of steadily generating operating cash flow and profits.
PayPal: Activist Investor Moves In
Five companies announced mass layoffs last week.
The biggest surprise came from the electric truck manufacturer Rivan Automotive Inc. which will slash 6% of its 14,000 employees. Rivan just went public last November with huge promise as it holds a multi billion-dollar contract with Amazon to deliver 100,000 electric vans by 2030.
- Despite Amazon's backing, since the IPO, the stock has been on a downward glide-slope and has lost some 80%.
New York Attorney General Letitia James has set her target on one of the nation’s largest pharmacy chains, CVS Health, announcing a lawsuit for violating antitrust laws. In the face of a market rally, CVS stock took the blow on the chin and finished the week unchanged.
While many banks are delivering solid results, Credit Suisse continues to struggle. Last week, they announced that CEO Thomas Gottstein would step down. For Q2, the bank reported a massive l$1.66 billion loss and mounting litigation provisions.
A 23 -year veteran of the bank, Gottstein was appointed CEO following the resignation of predecessor Tidjane Thiam after a spying scandal. The newly announced CEO, Ulrich Koerner, was previously CEO of the bank’s asset management division.
Where Are They Now?
From time to time, we like to revisit companies that came on our radar courtesy of a LevelFields alert.
Last June 15, Sidus Space, Inc., (SIDU) an aerospace company producing a range of high-tech hardware and services, announced it won part of NASA's $3.5 billion Exploration Extravehicular Activity Services Contract (xEVAS).
- The small-cap stock saw an immediate event impact of 225%, driving the stock price up to $7.63. Since then, it has given back much of its gain, falling to $3.53, but it is still well off its 52-week low of $1.26.
Highlights from the LevelFields Calendars section and beyond.
One Initial Public Offering is scheduled for this week:
Tuesday, August 2
Heavy Rare Earths Ltd. (HRE.AX)
One Stock Split is scheduled for this week
Monday, August 1: Quoin Pharmaceuticals, Ltd. (QNRX)
Notable Earnings Results Announcements
Monday, July 18
Onsemi (ON), CAN Financial Corp. (CAN), Affiliated Managers Group, Inc. (AMG), Global Payments, Inc. (GPN), Builders First Source, Inc. (BLDR), Kellogg Company (K)
Tuesday, July 19
Caterpillar, Inc. (CAT), Jet Blue Airways Corporation (JPLU), Uber Technologies, Inc. (UBER), BP PLC (BP), Marriott International Inc. (MAR), Marathon Petroleum Corp. (MAR)
Wednesday, July 20
CVS Health (CVS), Yum! Brands, Inc. (YUM), Sunoco, Inc. (SUN), AmerisourceBergen Corporation (ABC), Tradeweb Markets, Inc. (TW), Under Armour, Inc. (UAA)
Thursday, July 21
Alibaba Group Holding Limited (BABA), Crocs, Inc. (CROX), Eli Lilly & Co. (LLY), Wayfair Inc. (W), Duke Energy Corp. (DUK), Shake Shack, Inc. (SHAK), Restaurant Brands International (QSR), Intercontinental Exchange Group, Inc. (ICE), Liquidity Services, Inc. (LQDT)
Friday, July 22
DraftKings, Inc. (DKNG), Goodyear Tire & Rubber, Inc. (GT), AED Corp. (AES), Western Digital Corp. (WDC), Fluor Corp. (FLR), Canopy Growth Corp. (CGC)
Investors will be keen to identify if highly consumer-sensitive bellwether stocks miss their earnings estimates by any wide margin.
For instance, JetBlue should be flying high on the back of a rebounding consumer travel market. Yet, sky-high fuel costs and doubts about their proposed merger with Sprint have pushed JBLU stock down to trading near its 52-week low and towards levels not seen in a decade.
Liquidity Services, which specializes in buying mountains of unsold inventory from big box retailers at pennies to the dollar, is poised to beat estimates. The company earlier stated it is overwhelmed with incoming stock from retailers desperate to clear their shelves and warehouses to make space for the back-to-school frenzy – the second strongest shopping period behind Christmas.
As noted by Walmart in their earnings call, the growth of the mountain of returned and unsold retail merchandise is yet another sign of consumer belt-tightening.
Shake Shack will report on Thursday. One of the country's priciest burger and fries fast food franchises, the stock has lost half its market cap over the last year and is also nearing a 52-week low.
If consumers have money and confidence, they will readily wait in line to spend $10 for a burger at Shake Shack. If they don’t, they will eat at home or get a 99-cent special at Burger King – owned by Restaurant Brands International, which is also releasing earnings this week.
The LevelFields Team