Summary
- Last week’s rally following the favourable CPI inflation report shows again how hopeful investors are that the Fed will soon pause.
- Equities are now trading 7-10% above fair value and near the top of the range since early summer. We expect markets to remain in that range pending new data on earnings or rates.
- Only about 33 companies report this week, but they include many major retailers. Walmart and Target will be of special interest given their inventory problems.
- Tech bellwethers Cisco Systems and Applied Materials provide updates on industrial demand for technology. And Nvidia may shed light on whether the consumer electronics semiconductor glut is easing.
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Summary
- Last week’s rally following the favourable CPI inflation report shows again how hopeful investors are that the Fed will soon pause.
- Equities are now trading 7-10% above fair value and near the top of the range since early summer. We expect markets to remain in that range pending new data on earnings or rates.
- Only about 33 companies report this week, but they include many major retailers. Walmart and Target will be of special interest given their inventory problems.
- Tech bellwethers Cisco Systems and Applied Materials provide updates on industrial demand for technology. And Nvidia may shed light on whether the consumer electronics semiconductor glut is easing.
What We Learned Last Week
Last week’s favourable CPI data again proved equity investors are still latching onto any positive news as a sign the Fed will soon pause or even relent its campaign to corral inflation by raising rates. The S&P 500 (SPX) and Nasdaq 100 (NDX) surged 5.9% and 8.8% on the week. They are now 7% and 11% overvalued by our models.
We see them near the wide end of a range that has prevailed since early summer. We expect equities to remain in that range for now. If earnings weaken or rates continue to climb, especially at the longer end of the curve, we expect equities will trade lower. We maintain an underweight on equities in our overall asset allocation framework.
Earnings season continues be mostly constructive. Overall earnings beats are 3% with more than 90% of SPX companies reporting. Year ahead earnings projections are down 1% SPX and 3% for NDX since the beginning of 3Q earnings season – hardly a collapse yet.
The reopening trade continues to be robust, with companies such as Planet Fitness (PLNT), Norwegian Cruise Line Holdings (NCLH) and Wendy’s Co (WEN) reporting good results and outlooks. Walt Disney Co (DIS) has roots in both the reopening and pandemic economies – theme park profits are good, but rising costs to launch its Disney+ streaming service more than offset those gains.
The Week Ahead
Only about 33 companies report this week, but they include many of the major retailers, including Walmart (WMT) and Target (TGT). Both have been fighting excess inventory issues over the past two quarters. Several large tech companies are also reporting.
Monday
- Tyson Foods (TSN), supplier of poultry and meats, will report on the outlook for a key component of food inflation.
Tuesday
- Walmart (WMT) and Home Depot (HD) serve different corners of the retail space. Apart from inventories, investors will be looking for WMT to provide colour on margins and the holiday shopping season. HD has avoided inventory problems so far, but how is it managing exposure to the soft housing sector?
- To the extent that people are driving older cars because of high new and used car prices, Advance Auto Parts (AAP) may benefit from people doing DIY repairs.
- Aramark (ARMK), which provide commercial sites mundane but necessary things like breakroom supplies, uniforms, and cleaning services, should gain from more people working at the office.
Wednesday
- Comparison shopping: it will be interesting to compare results from Target (TGT) and WMT and from home improvement store Lowe’s (LOW) and HD.
- It will be a surprise if network manufacturer CISCO Systems, Inc (CSCO) is not capitalising on Corporate America’s need to upgrade technology and migrate to the cloud.
- Nvidia Corp. (NVDA), on the other hand, has been hurt this year by its exposure to consumer electronics; are those inventory issues showing signs of easing?
Thursday
- A variety of smaller retailers report today, including BJ’s Wholesalers (BJ), Gap, Inc (GPS), Kohls Corp. (KSS), Macy’s (M), Ross Stores (ROST), and Williams-Sonoma (WSM). Will they be reporting largely similar themes or more firm-specific issues?
- Applied Materials (AMAT), maker of semiconductor equipment and wafers, may provide useful colour on how widespread and deep the current semiconductor slump is.