Stocks ended Friday higher, despite downbeat economic data showing the level of devastation the coronavirus has unleashed on retailers and consumer confidence. It would seem the shrug of the market is based on the idea that the U.S. economy can’t get any worse. But is that the right approach, given the number the Americans currently out of work?
April retail sales plunged 16.4%, suffering their biggest decline on record. With much of the country shut down in April, not only did producer and consumer prices plunge, industrial production also declined. The dismal retail data is consistent with the dire unemployment we’ve seen which has steadily risen. Even amid the onslaught of negative data, the stock market has rallied some 30% from the March lows. This is notable as several retail heavyweights are due to report earnings results this coming week.
On Friday the Dow Jones Industrial Average rose 61 points, or less than 0.3%, to close at 23,685.42. The S&P 500 index added 11.20 points, or 0.4% to end the session at 2,863.70, while the Nasdaq Composite Index closed at 9,014.56 after gaining 70.84 points. Earlier in the day, the averages had each fallen more than 1% after the Trump administration ratcheted up trade tensions with China by moving to block semiconductor shipments to China’s Huawei from global chipmakers.
China immediately responded with a Global Times report suggesting China would put U.S. companies including Apple (AAPL), Cisco (CSCO) and Qualcomm (QCOM) on an “unreliable entity list.” The report also suggested China could suspend purchase of Boeing (BA) airplanes. Despite the slight bounce, stocks ended the week lower, with the Dow down 2.7%, the S&P 500 losing 2.3% and the Nasdaq 1.2% lower. Some analysts still think by year’s end the markets will be higher.
With interest rates at zero, and with talks of negative rates surfacing, the “TINA factor” (there is no alternative) will be a factor as stocks will be looked upon as the surest way to counter inflation. Here are this week’s names to keep an eye on.
Baidu (BIDU) – Reports after the close, Monday, May 18
Wall Street expects Baidu to earn 55 cents per share on revenue of $3.11 billion. This compares to the year-ago quarter when earnings came to 40 cents per share on revenue of $3.50 billion.
What to watch: Baidu shares have fallen about 5% over the past month, while the S&P 500 index has been roughly flat. The Chinese Internet search company, at the end of March, offered some optimism, saying it expected its ad business would recover from late in Q2. The company which has increased investments in its core search business, cloud and artificial intelligence, has had various business segments effected due to the coronavirus. But while the company has noticed some improvement in its business (quarter over quarter), it still expects revenue to decline year over year, per its late-February guidance.
Home Depot (HD) – Reports before the open, Tuesday, May 19
Wall Street expects Home Depot to earn $2.28 per share on revenue of $27.61 billion. This compares to the year-ago quarter when earnings came to $2.27 per share on revenue of $26.38 billion.
What to watch: Home Depot stock is up 10% year to date, compared with the 11% drop in the S&P 500 index. The home improvement giant has established a strong track record for beating consensus estimates, while profits have have topped Street forecast in every quarter over the past five years. This, however, was pre-Covid-19. Can the streak continue? The environment has created an opportunity for Home Depot to take market share of the next two to three years, according to Raymond James analysts, who has an Outperform rating on the stock with a price target of $245. The analysts believe Home Depot will continue to benefit from the investments it has made in technology and fulfillment, particularly as independent stores begin to shutter doors.
Walmart (WMT) – Reports before the open, Tuesday, May 19
Wall Street expects Walmart to earn $1.10 per share on revenue of $130.17 billion. This compares to the year-ago quarter when earnings came to $1.13 per share on revenue of $122.95 billion.
What to watch: Expectations are high heading into Walmart’s earnings report as many analysts project market share gains for the retail giant not only for its physical stores, but also for its e-commerce revenue. Notably, this is despite weak consumer data, showing a 16% decline in retail sales. The company has taken a page out of Amazon’s (AMZN) playbook model by growing revenue and sacrificing EPS in the process through further “investment” in the customer fulfillment expenses. In the process, its digital revenue have shown tremendous growth, averaging 40% annualized gains over the past four quarters. For the stock to keep rising, however, on Tuesday Walmart must show not only sustained e-commerce growth, but also improved margins and same-store-sales.
Target (TGT) – Reports before the open, Wednesday, May 20
Wall Street expects Target to earn 39 cents per share on revenue of $18.97 billion. This compares to the year-ago quarter when earnings came to $1.53 per share on revenue of $17.63 billion.
What to watch: How strong is the consumer? While the peak of Covid fear has subsided, that doesn’t mean there will be an immediate recovery among consumers, which has been the driving force of the U.S. economy. April retail sales plunged more than 16% on a month-to-month comparison, after backing out the auto and gas categories. They were also down16% year over year. While Target has been one of the better performers in the retail sector, with its shares up 14% over the past thirty days and is down 5.6% year to date (compared with the 11% drop in the S&P 500 index), it will need strong top- and bottom-line results, solid digital growth and upside guidance to keep investors optimistic.
Nvidia (NVDA) – Reports after the close, Thursday, May 21
Wall Street expects Nvidia to earn $1.68 per share on revenue of $2.99 billion. This compares to the year-ago quarter when earnings came to 88 cents per share on revenue of $2.22 billion.
What to watch: Shares of the graphic chip powerhouse has gone on an impressive run, surging 21% in thirty days and almost 70% in six months. With the stock up 44% year today, compared with the 11% drop in the S&P 500 index, valuation concerns have emerged. But that’s nothing new for Nvidia. Four straight earnings beats have gotten investors more optimistic about the market for graphics cards used not only in video games, but also due to the company’s exposure to multiple secularly growth markets such as the datacenter, autonomous driving, artificial intelligence, among others. All told, Nvidia’s guidance on Thursday will be the key factor in whether the stock will go higher or succumb to profit taking.
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