Summary
- Equities continue to trade in the middle of the past six-month trading range, awaiting some catalyst to push them higher or lower.
- We see risks weighted to the downside, but fiscal stimulus could offset potential weakness. Two companies reported strong 2023 outlooks because of spending associated with the Infrastructure Investment Act and the CHIPS Act.
- Only 31 companies report this week, but over 90% of them are in the tech and consumer sectors. We should get some interesting reads on the ongoing tech CAPEX boom and consumer spending.
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Summary
- Equities continue to trade in the middle of the past six-month trading range, awaiting some catalyst to push them higher or lower.
- We see risks weighted to the downside, but fiscal stimulus could offset potential weakness. Two companies reported strong 2023 outlooks because of spending associated with the Infrastructure Investment Act and the CHIPS Act.
- Only 31 companies report this week, but over 90% of them are in the tech and consumer sectors. We should get some interesting reads on the ongoing tech CAPEX boom and consumer spending.
What We Learned Last Week
Equities enjoyed a mostly good tone last week, with the S&P 500 up 1.5% and the NASDAQ 100 up 0.8%. But as we noted last week, equities remain near the middle of a six-month trading range, awaiting some catalyst that pushes them higher or lower.
The most likely candidates on the upside today are a Fed pivot and a sharp decline in the 10-year yield. On the downside are stubbornly high inflation, a hawkish Fed, and the ongoing friction of higher rates which starts to slow or halt earnings growth.
We maintain that risks are weighted to the downside. Investors should take advantage of the rally to reduce exposure to equities.
Fiscal Stimulus Coming?
Last week’s earnings reports offer a possible counter to this pessimistic view. Farm equipment manufacturer Deere & Co. (DE) posted large beats and full order books for 2023, largely on the strength of growing infrastructure spending due to the Infrastructure Investment and Jobs Act (2021).
Jacobs Solutions (J), an engineering, construction, and scientific consultant, pointed to rising demand for its services due to the Infrastructure Act and the CHIPS and Science Act, which will funnel government money to the semiconductor sector.
These are the first corporate mentions we have seen about the possible fiscal impact of those stimulus acts – and something to watch for in coming earnings reports.
Retailers Beat – But Caution Too
Retailers are posting solid beats on revenue and earnings per share as they have mostly been able to pass on rising costs. But the yellow flag is that some, including Dick’s Sporting Goods (DKS) and upscale department store Nordstrom (JWN), issued outlooks implying decelerating sales growth in the current quarter.
Discount retailer Dollar Tree (DLTR) reported higher revenue and average ticket size but declining traffic.
Processed food manufacturer JM Smucker Co. (SJM) beat on revenue and earnings and offered a bullish outlook, saying that consumers are eating at home more. Higher prices have yet to drive people away from name brand products.
The Week Ahead
Another light week is coming, with 31 companies scheduled to report. The calendar is heavily weighted to information technology (60%) and consumer discretionary (25%). This will provide new colour on corporate demand for new tech and where consumers are spending their deflating dollars.
Tuesday
- Is Hewlett Packard Enterprises (HPE), a provider of corporate IT solutions, participating in the tech CAPEX boom? Or will legacy issues continue to be a deadweight?
- After posting losses for the past several years, cybersecurity specialist CrowdStrike Holdings’ (CRWD) earnings are expected to finally move into the black.
- Intuit (INTU) will provide a useful update on whether smaller businesses are investing in technology upgrades.
Wednesday
- Five Below (FIVE) markets miscellaneous products, for example, phone cases, headphones, chargers, candy, books, and pet supplies. But are these necessities?
- Meat and poultry vendor Hormel Foods (HRL) is likely benefiting from the eat-at-home trend.
- Petco Health and Wellness Co. Inc. (WOOF) provides a read on consumer spending on pets.
- Salesforce Inc. (CRM) and Snowflake Inc. (SNOW) should be front and centre in corporate efforts to upgrade their technology.
- Victoria’s Secret (VSCO) lifts the veil on demand for intimate wear.
Thursday
- Dollar General (DG), discount goods and groceries retailer, should do well. If not, that will say a lot about the outlook for consumer spending among lower-income people.
- Kroger Co. (KR) will likely report robust earnings, but analysts will be focusing more on its proposed $25 bn merger with grocery competitor Albertsons (ACI).
- Marvell Technology (MRVL), Smartsheet Inc. (SMAR), Unipath Inc., (PATH), and Zscaler (ZS) all provide cloud-related hardware and software products for corporations. They will provide some colour on more specialised niches of the tech marketplace.