While the long-anticipated Fed Pivot is definitely here, there’s still less certainty on when the Fed will actually start cutting interest rates. New inflation data suggests more time might be needed to curb the cost of living. As such, while the “risk-on” mode is the new bull market is still alive, Friday’s trading action suggests investors are taking a wait-and-see attitude. For how long they will wait, that remains to be seen.
The producer price index for January, a measure of wholesale inflation, increased 0.3%, according to the U.S. Bureau of Labor Statistics. Economists polled by Dow Jones had expected a gain of 0.1% and a turnaround from December's -0.1% decrease. Excluding food and energy, core PPI rose increased 0.5% month-over-month, higher than the expectations for a 0.1% climb. The downbeat PPI data comes on the heels of a strong consumer price index report, underscoring the fact that the Fed's fight against inflation was far from over.
The higher-than-expected CPI and PPI reports are forcing investors to curtail their expectations for when the Fed will cut rates. According to the CME FedWatch tool, the odds of a 25 basis point rate cut by the Fed in March is now at 11%. That is down from 16% a week ago and a 65% a month ago. The shift in sentiment sent the major benchmarks lower Friday with the Dow Jones Industrial Average falling 145.13 points, or 0.37%, to close at 38,627.99. Leading the blue-chip lower, among others, were Apple (AAPL), Microsoft (MSFT), Intel (INTC) and Walt Disney (DIS).
The S&P 500 gave up 24.16 points, or 0.48%, ending the day at 5,005.57. Of the eleven S&P sectors, six were in negative territory, with Communication Services falling the most. Materials topped the gainers. The tech-heavy Nasdaq Composite fell 0.82%, giving up 130.52 points to close at 15,775.65. The roller coaster week for stocks ended with all three major indexes finishing the week in the negative territory, breaking their five-week winning streak.
Meanwhile, earnings reports delivered so far have been encouraging. So far, of the roughly of 80% of S&P 500 companies have provided their results, three-quarters have topped analysts estimates. Will the trend continue this week? Here are the stocks to watch in this holiday-shortened week, with U.S. equities closed on Monday for President's Day.
Walmart (WMT) - Reports before the open, Tuesday, Feb. 20
Wall Street expects Walmart to earn $1.41 per share on revenue of $149.82 billion. This compares to the year-ago quarter when earnings came to $1.50 per share on revenue of $151.47 billion.
What to watch: Shares of Walmart continue to be one of the better performers in retail. Walmart has gone on an impressive run over the past month, rising more than 6%, compared with a 5% rise in the S&P 500 index. Walmart’s stock performance over the past year, rising some 17%, is noteworthy given the challenges of rising inflation. The shares are now up 10% year to date, besting the 5.5% risen in the S&P 500 index. While the Federal Reserve has done a solid job combating the rising cost of living, Walmart continues to feel the effects of higher input costs and other operating overhead, but its management has found ways to offset these costs to deliver an earnings beat in three of the past four quarters.
For the just-ended quarter, investors will be looking for signs of steady revenue growth, particularly in core segments like groceries and e-commerce. Likewise, any shifts in consumer behavior, including online shopping trends, will be of interest. While e-commerce is vital, the performance of Walmart's physical stores, particularly same-store sales figures and foot traffic trends will help gauge the health of its brick-and-mortar presence. Analysts will be looking for any signs suggesting that logistics and operating margins issues are in the rearview mirror. These metrics will reveal how well Walmart is managing costs and optimizing its operations. Upside guidance for the first quarter and full year, along with positive commentary about its market share growth will also be closely-watched.
Palo Alto Networks (PANW) - Reports after the close, Tuesday, Feb. 20
Wall Street expects Palo Alto to earn $1.16 per share on revenue of $1.84 billion. This compares to the year-ago quarter when earnings came to 83 cents per share on revenue of $1.55 billion.
What to watch: When it comes to growing revenues and profits among the cybersecurity space, you would be hard-pressed to find a stronger-performing name than Palo Alto Networks. The cybersecurity specialist has consistently outperformed. Offering a diversified suite of specialized security products, Palo Alto continues to benefit from its leadership position in seven key cybersecurity categories, and thus is expected deliver more growth on both the top and bottom lines when it reports results for the quarter that ended January. Investors are expecting another strong quarter, evidenced by the stock’s impressive performance. The shares have risen 110% over the past year, including 70% over the past six months. Meanwhile the stock is up 25% year to date, compared to a year-to-date rise of 5% for the S&P 500 index.
But it's still not time to take profits, according to Wedbush Securities. Citing Palo Alto’s increasing cloud deal momentum in the "Golden Age of Cybersecurity,” Wedbush raised the stock as Outperform, while booting the price target on Palo Alto Networks to $425 from $350, suggesting potential premium of 15%.
“We are seeing strong cybersecurity deal activity for the stalwart across the board with cloud-influenced, enterprise-wide deals as the theme of the January quarter,” noted Wedbush. Despite concerns about valuation amid recent gain in share price, the firm kept PANW as a top cyber pick to own in 2024. The company on Tuesday will be tasked with demonstrating it can still live up to such lofty expectations to support the stock's strong year-to-date performance.
Nvidia (NVDA) - Reports after the close, Wednesday, Feb. 21
Wall Street expects Nvidia to earn $4.56 per share on revenue of $20.38 billion. This compares to the year-ago quarter when earnings came to 88 cents per share on revenue of $6.05 billion.
What to watch: What can be said about Nvidia that has not already been said? With year-to-date stock gains of close to 50%, crushing the 5% rise in the S&P 500 index, the market has run out of superlatives to describe the AI chip juggernaut. Expanding that horizon by one year and three years, Nvidia stock has skyrocketed 222% and 390%, respectively. For investors who are thinking of taking profits, consider that despite the strong stock performance, the shares appear cheap. This is because, as the stock has risen, the company continue to raise its profit forecast, demonstrating that the euphoria surrounding artificial intelligence (AI) and generative AI is more than just hype.
Companies are scrambling to identify AI opportunities and/or establish their generative AI capabilities to either improve their market position or operate their businesses more efficiently. However, very few companies, particularly from an enterprise perspective, can realistically say they are where they want to be for widespread use. That is where Nvidia comes in. Nvidia’s chips will help these corporations achieve their AI objectives, whether it be via productivity gains or efficiency from AI automation, suggesting there is still an extremely long growth runway ahead. When adding the company’s revenue totals for the first three quarters of the year and factoring it’s Q4 guidance, Nvidia is projected to deliverer fiscal 2023 revenue of close to $60 billion.
With Nvidia stock trading for just 24 times current forward estimates, it belongs in every growth portfolio for 2024 given the company’s strong fundamentals. But to continue to the stock's upward trend, the company on Wednesday must continue to tout its growth prospects for the next quarter and beyond.
Block (SQ) - Reports after the close, Thursday, Feb. 22
Wall Street expects Block to earn 47 cents per share on revenue of $5.43 billion. This compares to the year-ago quarter when earnings came to 42 cents per share on revenue of $4.49 billion.
What to watch: Shares of Block have been under pressure, falling some to 5% over the past week, while falling 15% year to date compared to 5% rise in the S&P 500 index. Meanwhile, the shares have fallen 20% over the past year, trailing the 21% rise in the S&P 500 index. But there’s an opportunity here for investors who are willing to wait the next 12 to 18 months. Benchmark Securities analyst Mark Palmer recently initiated coverage of the fintech sector with Buy recommendations on five stocks, including Block, while assigning an Overweight rating on the sector.
"While most current fintech stock valuations reflect pessimism or doubt concerning the prospects of the companies within the sector, we believe several companies within the space have ample room for strong growth in the coming years," Palmer wrote in a note to clients. "In general, we believe the extent to which the fintech space has fallen out of favor with investors, as reflected in the discount valuations of many of its constituents, has created a favorable environment for stock-picking and has given rise to several 'baby-with-the-bathwater' opportunities."
Originally called Square, and known for its peer-to-peer money-transfer service Cash App, the company rebranded its name to Block to present an emphasis on its shift towards blockchain technology. Although Block continues to buildout what it envisions as a decentralized finance business using cryptocurrency, the management expects Cash App, which is already used to buy and sell Bitcoin, to lead the new business. On Thursday investors will want more details on these initiatives to assess where the stock valuation should be.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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