Summary
- After another 4.6% drop last week, the S&P 500 is trading at fair value. We look for it to trade in a range for now, and track earnings, likely lower.
- The NASDAQ is still 14% overvalued – we see more pain coming here.
- It is another light week for earnings with 12 companies reporting. But it is an interesting mix, with travel companies Carnival Corp and Vail Resorts, and sports fashion Nike reporting on (presumably) changing consumer tastes.
- CarMax may indicate whether used car supply is likely to rise (and used car prices ease); and Micron Technology may provide clues about whether appetite for consumer electronics is returning.
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Summary
- After another 4.6% drop last week, the S&P 500 is trading at fair value. We look for it to trade in a range for now, and track earnings, likely lower.
- The NASDAQ is still 14% overvalued – we see more pain coming here.
- It is another light week for earnings with 12 companies reporting. But it is an interesting mix, with travel companies Carnival Corp and Vail Resorts, and sports fashion Nike reporting on (presumably) changing consumer tastes.
- CarMax may indicate whether used car supply is likely to rise (and used car prices ease); and Micron Technology may provide clues about whether appetite for consumer electronics is returning.
What We Learned Last Week
Another week, another 4.6% drop in the S&P 500 (SPX) after a hawkish Fed statement and renewed recession fears. After the first drop the SPX was about 3.3% overvalued; now it sits at fair value after forward earnings dropped 0.7% to $223.32.
Barring some major shock, we do not expect the SPX to fall much below our earnings-based fair value measure. It will likely trade in a range for now and track earnings- which most likely will trend downward in coming months.
The Nasdaq 100 on the other hand is still some 14% above fair value even after a 10.1% drop over the past two weeks. Look for more pain to come.
Earnings last week were mostly constructive. Food processor and manufacturer General Mills (GIS) reported strong earnings, and said more people are opting to eat at home. It has been able to pass on rising costs and actually raised its full year forecasts.
Darden Restaurants Inc. (DRI), home of name brand restaurants such as Olive Garden, also reported good sales and demand – but at the cost of weak earnings due to its interesting (and probably unsustainable) strategy of avoiding passing on higher costs to diners.
Warehouse superstore Costco (COST) also produced top and bottomline beats and maintained its outlook. It said supply chain and cost pressures are improving. It maintained its multi-decade $1.50 price of a combo hotdog and soda – a move that will surely keep shoppers coming back.
And AutoZone (AZO), auto parts retailer, confirmed that rising inflation is bringing out the DIY gene in more consumers as more people opt to do some service on their cars.
Another Light but Interesting Week Ahead
Only 12 companies are scheduled to report this week, but the mix tilts more to the consumer discretionary sector.
Monday
- Two smaller tech companies – Jabil (JBL) and TD Synnex (SNX) report. Both make electronics and instruments and deal primarily with corporate clients. This will be another test of our thesis that tech companies, that are focusing on corporates rather than consumers, are doing well.
Wednesday
- Jefferies Financial (JEF) may provide an early read on how investment banks are faring as interest rates jump higher.
- Thor Industries, maker of RVs, will surely report that rising rates is choking off demand for travel by RV.
- Paychex Inc (PAYX) should be doing well as more companies turn to IT solutions for HR function to deal with labor shortages.
- Cintas Corp (CTAS) supplies companies with a variety of products people need – restroom supplies, uniforms, first aid and safety equipment and the like. Its performance and outlook should be a good barometer on how the return to the office is going.
- Vail Resorts (MTN) likely had a great summer – the big question is whether people are still planning trips to their resorts this fall and winter.
Thursday
- Used car vendor CarMax Inc (KMX) is probably selling every used car it gets – is there any indication that the supply of used cars will increase any time soon?
- Recall that Micron Technology (MU) was the first tech manufacturer to report a sharply weaker outlook back in early June, when a sudden drop in demand for consumer electronics left it with an inventory overhang of memory chips and semiconductors. MU stock dropped 14%. At the time, the company said it needed a quarter or two to work off inventory then it would return to normal. We will see if that is still the case.
- With people getting out more, are they turning to Nike Inc (NKE) products to look good?
Friday
- Carnival Corp (CCL) gives another read on consumer appetite for travel and spending big on vacations.