A weaker-than-expected jobs report for June, which lowered the unemployment rate to 3.6%, appears to be taking some steam out of what had been a stunningly strong labor market. Investors were seemingly in a see-saw battle in assessing how to digest the news. This is because what’s bad for the economy has shown to sometimes be be “good news” for stocks. In this case, lower jobs growth could be seen as reason for the Federal Reserve to pivot from its hawkish stance with monetary policy.
That was not the case on Friday as stock fell for a second straight session on renewed concerns that the Federal Reserve may start hiking rates again after its pause in June. According to the Department of Labor, 209,000 new jobs were created in June, which was lower than Dow Jones consensus estimates for growth of 240,000. What’s more, it marked a meaningful drop from May’s jobs total of 306,000. Despite the shortfall, the total number is still strong from a historical perspective, and sent the unemployment rate lower by 0.1 percentage point.
The report also revealed that average hourly earnings, a closely-watched metric, increased by 0.4% in June and rose 4.4% from a year ago. Also when looking at the jobs number, it could have been much worse. This is partly because the job growth included 60,000 government jobs, many of which came from the state and local levels. Nevertheless, investors weren’t willing to risk recent gains and bet that the Fed would start its pivot. The Fed has indicated that they plan to raise interest rates at least on two more occasions, and it appears that the market is starting to believe that this will actually happen.
On Friday the Dow Jones Industrial Average declined 187.38 points, or 0.55%, to close at 33,734.88. Apple (AAPL), Microsoft (MSFT), IBM (IBM), Nike (NKE), Salesforce (CRM) and several other blue-chip names were under pressure. The S&P 500 index dropped 12.64 points, or 0.29% to end at 4,398.95, while the tech-heavy Nasdaq Composite declined 18.33 points, or 0.13%, to end at 13,660.72. This was the second consecutive day of declines for the indexes which ended last week with a massive rally.
All three major averages posted weekly declines. The Dow fell the most, losing 1.5% loss for the week. The S&P 500 is off by 0.6%, while the Nasdaq gave up just 0.3%. The declines have not been as pronounced, especially when compared to the massive June rally. With the second quarter earnings season imminent, the market is looking for another catalyst to go higher. Staying invested and riding the rate-hike cycle might appear hard to do, but it can pay off in the long run, especially by focusing on big-cap stocks with strong balance sheets that have pulled back to more attractive levels. With that in mind, here are the earnings I’ll be watching this week.
Delta Air Lines (DAL) - Reports before the open, Thursday, Jun. 13
Wall Street expects Delta to earn $2.36 per share on revenue of $14.44 billion. This compares to the year-ago quarter when the loss came to $1.44 per share on $12.31 billion in revenue.
What to watch: Airline stocks have been one of the strongest rebounding sectors after being under pressure for most of 2022. One of the biggest beneficiaries has been Delta Air Lines, which has seen its shares soar 44% year to date, compared to a 15% rise in the S&P 500 index. Over the past six months the stock has risen 31%, while the S&P 500 index has returned 13%. Investors want to know whether the gains can continue. According to recent booking trends, that’s likely the case. Bookings rebounded after the Juneteenth holiday, with system net sales up 4.0%, according to recent report by Bank of America, compared to level seen in 2019 for the week ending June 25. The report also showed an increase in volumes, even as pricing decelerated. Having already issued strong second quarter guidance a update that sparked a late June rally across the sector, Delta is likely to benefit from this increased demand, especially with travel hitting record levels for the 4th of July holiday weekend. Ahead of the Q2 earnings report, the company is expected to benefit from revenue increases from both domestic and international travel, where it has reported a gradual recovery, especially in Latin America and Transatlantic routes. As such, Delta remains one of the better bargains in transportation stocks.
Citigroup (C) - Reports before the open, Friday, Jun. 14
Wall Street expects Citigroup to earn $1.40 per share on revenue of $19.68 billion. This compares to the year-ago quarter when earnings were $2.19 per share on revenue of $19.64 billion.
What to watch: Commercial bank stocks such as Citigroup did not fare as well as investors expected in the first half of the year, particularly amid a period of rising interest rates. Banks often benefit from increasing interest rates which increases the net interest margins and their overall profits. However, that was not the case for Citigroup, which has seen its stock fall more than 4% over the past six months, while the S&P 500 index has risen more than 13%. As with the rest of the sector, the fallout from the failure of Silicon Valley Bank has pressured Citigroup stock amid fears of liquidity pressures. But Citigroup has a sound strategy to outperform over the next 12 to 18 months, including the divestment of its global consumer bank, accelerated investments in wealth management, while also upping its investment in its Services division comprising Trade and Transaction Services and Security Service. Heading into the second quarter, investors will be looking for progress in these key areas. Meanwhile, with the stock trading some roughly 26% below its 12-month price target of $57, while paying dividend yield of 4.41%, Citigroup looks like a solid bargain for the second half of 2023, especially with a potential for the bank to resume its share buyback program.
JPMorgan Chase (JPM) - Reports before the open, Friday, Jun. 14
Wall Street expects JPMorgan to earn $3.97 per share on revenue of $38.97 billion. This compares to the year-ago quarter when earnings came to $2.76 per share on revenue of $31.63 billion.
What to watch: With gains of just 4% over the past six months, compared to the 13% rise for the S&P 500 index, shares of JPMorgan Chase have not delivered the results investors expected, particularly during a period of rising interest rates. Nevertheless, JPMorgan’s performance is still good enough to beat several money center bank peers. And that's in part because bank stocks have been out of favor for most of the year. The slowing of the U.S. economy, coupled with the recent liquidity crisis, has been to blame. Other issues such as slowing loan demand which has impacted the banking sector, combined with rising funding costs has caused investors to shy away from banks. But JPMorgan, which has benefited from some flight-to-safety investment flows, remains well-positioned to navigate the tough environment. What's more, relative to its bank peers, JPMorgan’s consistency and operating efficiency is also being rewarded for its ability to return value to shareholders by making strategic shifts in branch-based expansion, technology-driven payments, among other forms of organic growth. Accordingly, with the bank projected to grow EPS at an annual rate of 9% in 2023, JPMorgan appears grossly undervalued relative to expectations. What’s more, at the current valuation of $144 per share, and priced at a forward P/E ration of 12, JPMorgan stock trades below the average price target of $154, making it a strong bargain for investors who are looking for exposure in the banking sector.
Wells Fargo (WFC) - Reports before the open, Friday, Jun. 14
Wall Street expects Wells Fargo to earn $1.18 per share on revenue of $20.08 billion. This compares to the year-ago quarter when earnings were 74 cents per share on revenue of $17.03 billion.
What to watch: On the heels of the recent stress test that revealed megabanks will come under lighter capital requirements, investors have flocked to several big bank stocks over the past couple of weeks, sending the KBW Regional Banking ETF (KBWR) higher. Wells Fargo was among several banks that are planning higher shareholder dividend payouts. Although Wells Fargo which has risen 4% year to date, that has underperformed the broader market's 15% rise. Still, the bank has executed much more consistently than previous years -- not only is the bank more financially stable, its management has focused on ways to lower expenses and become more efficient to boost the bottom line. Reducing its headcount from 246,000 at the end of March 2022 to 235,000 at the end of March 2023 has been one of the ways Wells Fargo has lowered operating expenses. The headcount reduction, among other initiatives, has also lowered non-interest expenses, while boosting net interest income which grew 45% in the first quarter. While management remains cautious and is looking to strengthen its loan portfolio, namely in mortgages and autos, the stock’s current valuation looks attractive on the basis of its balance sheet improvements. Combined with several cost-saving initiatives, there’s roughly $20 billion worth of buybacks still left to execute. On Friday the bank will nonetheless need a top- and bottom-line beat to affirm this bullish thesis.
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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