Markets This Week, 5/15-19 2023: Tech a Safe Haven from Debt Ceiling Impasse and Bank Troubles

Economy and Markets: The Week Ahead

The main theme for now, unfortunately, remains the debt ceiling. Markets rose through the week on optimism about the ongoing negotiations; however, the weekly rally was sharply reversed on Friday as the Republican negotiators left the meeting, calling the White House representatives “unreasonable” and adding that they are putting the talks on pause. Before the breakdown in negotiations, the S&P 500 (SPX) touched its 9-month high. Now, instead of counting the gains, stock markets will be counting the minutes until the talks resume – or, worse, counting the days left until default.

UBS (UBS) strategists have warned that if the U.S. fails to raise the debt limit and delays government payments, stocks might plunge as much as 20% and the economy will take a hit. Up until now, stock markets didn’t attach a specific probability to the default outcome, with only the Treasuries market raising red flags.

Apart from the fact that, according to Treasury Secretary Janet Yellen, the U.S. might be in technical default as early as June 1, some more worries are blowing in the face of a nascent bull market. Yellen reportedly said that more forced bank mergers will be needed in the near future as the industry is still in crisis; the KBW Nasdaq Regional Banking Index, which was rallying nicely on news of an uptick in deposits at Western Alliance (WAL), dropped after the report.

In addition, the question of a pause or no pause in rate hikes in June remains on the table. Federal Reserve Chair Jerome Powell indicated on Friday that he wants to wait and see whether the lagged effects of previous hikes, coupled with the credit tightening stemming from the banking sector troubles, are helping to decelerate inflation. Still, comments of other interest rate committee members, cited in their speeches in the prior days, reveal that some policymakers are not convinced that price pressures are coming down quickly enough to warrant a pause. The chances of a pause in June are high, barring unexpected events, but it is not a done deal yet.

Big Tech: Beware of FOMO

The S&P 500 has rallied over 17% from its latest low point in October last year; the Nasdaq Composite has surged almost 24% and the Nasdaq 100 has risen over 29% from the indices’ lows in December. Meanwhile, pessimism towards this rally is so widespread that one cannot but question: if everyone is so negative on U.S. stocks, whose long positions are firing up the markets? And how long can this party go on, if the economy is weakening, inflation is still high, and the corporate sector is in an earnings recession?

According to a survey by Bank of America (BAC), conducted May 5-11 (i.e., before the debt ceiling issue became as pressing as it is now), global fund managers are bearish, but not overly so. Most of the money managers are preparing for a soft landing with a small earnings contraction; while they have increased their exposure to equities, they have been repositioning out of cyclicals (financial, commodities, etc.), and into defensives, mostly technology stocks. Hedge funds follow the same path: according to Goldman Sachs (GS), their cyclical versus defensive exposures fell to the lowest level since Q3 2020.

Everyone is so tired of the doomsday scenarios we have been hearing for over a year now, that any good, or even less-bad-than-expected news, can spark another leg upward in the markets. The widespread pessimism actually adds to these stock market jumps by creating short squeezes.

But the undisputed leaders of the last seven-month upward movement are, of course, technology stocks, specifically Big Tech. Basically, prudent investors do have not many other options in the U.S. markets: large technology companies are the only ones that can offer a prospect of earnings growth even in a weakening economy; they are as insulated as possible from the banking turmoil as they aren’t dependent on bank funding; and they benefit from the latest market craze, the generative AI technology. Besides, after initial increases from their lows, Big Tech has been propelled up by investors’ FOMO (“Fear of Missing Out”) bets.

In the long term, the tech sector will continue benefiting from digital transformation, as civilization isn’t just helped by technology anymore, but technology is civilization. But at the moment Big Tech is in overbought territory with excessive valuations, increasing the risk of a correction in the near term.

Thus, investors that have already bought shares of Tech titans like Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta (META), Apple (AAPL), and Nvidia (NVDA) would be well advised to continue holding on to these stocks; those that are contemplating their entrance now might want to think twice. Although the technology giants’ forward P/Es are nowhere near the levels seen in their Covid-19 enormous rally and may rise further from here, no one can be sure when the market will decide that things have gotten out of hand and pull back. We at TipRanks strongly advise against trying to time the market; investors are advised to base their decisions upon trustworthy data and analysis.

Upcoming Earnings and Dividend Announcements

The reporting season is drawing to an end, but some important reports are still coming out this week.

The most anticipated releases this week include, first of all, Nvidia (NVDA), and also Lowe’s (LOW), Palo Alto Networks (PANW), Analog Devices (ADI), Snowflake (SNOW), Costco (COST), and Dollar Tree (DLTR).

Companies’ reporting dates, consensus EPS forecasts, and past data, together with their analyst ratings and price targets, can be found on the TipRanks Earnings Calendar.

This week’s Ex-Dividend dates are coming for the payouts of Johnson & Johnson (JNJ), Valero Energy (VLO), Applied Materials (AMAT), CDW (CDW), Equifax (EFX), and other U.S. and international dividend-paying firms.

Companies’ Ex- and Payment dates, together with their analyst ratings and price targets, can be found on the TipRanks Dividend Calendar.

Upcoming Economic Calendar Events

This week we’ll see published several important reports, in both the U.S. and global markets.

The U.S.: Tuesday will be busy with crucial data on preliminary May’s S&P Global Manufacturing PMI and Services PMI, as well as April’s New Home Sales and May’s Richmond Fed Manufacturing Index. But Thursday will be even busier, with April’s Chicago Fed National Activity Index (CFNAI), Q1 2023 Personal Consumption Expenditures (PCE), and a second reading on Q1 2023 GDP Growth Annualized coming out on that day. Finally, on Friday, we’ll see published reports on April’s Durable Goods Orders, PCE, Personal Income,and Personal Spending, as well as May’s Michigan Consumer Sentiment Index and the University of Michigan’s 5-year Consumer Inflation Expectations.  

Elsewhere, this week we’ll see several important reports on the state of the U.K. economy, including May’s Manufacturing and Services PMIs, April’s CPI, and April’s Retail Sales. In China, the central bank will decide on its key interest rate this week. In the Eurozone, we’ll receive a preliminary report on May’s Consumer Confidence, as well as preliminary May’s Manufacturing and Services PMIs.  

Current and scheduled economic reports, Fed statements, and other releases, as well as their level of impact on stock markets, can be found on the TipRanks Economic Calendar.

Equities – Review of Last Week’s Performance

This past week began with sideways trading, followed by excitement about a resolution of the debt ceiling issue, which pushed the stocks upward so much that the S&P 500 reached its year-to-date high on Thursday. However, the optimism dissipated on Friday following a breakdown in debt ceiling negotiations and a return of uncertainty concerning the situation at regional banks, as Janet Yellen hinted that the banking sector turmoil may not be over. Still, all indexes finished the week in the black, with the Nasdaq 100 (NDX) logging in the biggest weekly gain, 3.6%, followed by Nasdaq Composite’s (NDAQ) 3.1% increase. The S&P 500 (SPX) finished the week up 1.9%, and the Dow Jones Industrial Average (DJIA) was up 0.7% on the week. Sector-wise, the biggest weekly winners were, obviously, IT and Communication Services, while the biggest loss was registered in the Utilities sector.

Stock Highlights of the Past Week

This past week the markets reacted to several earnings reports, with the most prominent of them being, of course, Walmart. Below are the most noteworthy reports of the past week:

» Tower Semiconductor (TSEM) reported a decline in revenues, in line with expectations and beat on earnings. This could be TSEM’s last quarterly report as the company is in the process of being acquired by Intel (INTC).

» Home Depot (HD) reported earnings which were slightly better than expected; the stock fell after the company slashed its revenue guidance for FY 2023 on expected lower sales.

» Cisco Systems (CSCO) beat expectations on revenues and earnings and offered optimistic guidance for the current quarter.  

» Take-Two Interactive Software (TTWO) saw its stock jump even though earnings missed estimates by a large margin; however, revenues beat estimates, while the EPS miss was caused by one-off events such as impairment charges.  

» Target (TGT) said revenues almost stalled year-on-year but earnings topped expectations; the company projects weak sales in the current quarter but expects to benefit from cost-cutting measures.

» Walmart (WMT) beat earnings and revenue expectations and raised its full-year guidance to reflect strong first-quarter results.

» Alibaba (BABA) slightly missed on revenues but beat analysts’ earnings expectations. Analysts are positively impressed by the ongoing major changes at the Chinese giant, which is intent on splitting into several units, as the split could unlock value for investors.  

» Deere (DE) exceeded revenue and earnings estimates and raised its full-year profit forecast amid strong demand for farm and construction equipment and improved operating environment.

» » Our Star of the Week is Adobe Inc (ADBE), whose stock surged almost 10% on the week, outpacing even that of NVDA. The content creation software giant has already made an impressive foray into incorporating AI into its products; its strategic partnership with Alphabet will help its progress in this domain. RBC Capital and Jefferies have assigned a buy rating for ADBE lately; numerous upward earnings revisions are a good sign of the company’s outlook.

Major Economic Events of the Past Week

The U.S.

May’s NY Empire State Manufacturing Index tumbled to -31.8 from April’s 10.8, versus the expectations of a decline to -2.5.

April’s Retail Sales rose 0.4% from March’s -0.6% versus the expected increase of 0.7%.

April’s Industrial Production rose 0.5% from March’s zero change; it was expected to remain flat in April, as well.

Initial Jobless Claims for the week ending May 12^th came in at 242K, down from the previous week’s 264K and lower than the expected 254K. Continuing Jobless Claims for the week ending May 5^th were at 1,799M, down from the previous week’s 1,807M.

May’s Philadelphia Fed Manufacturing Survey rose to -10.4 from April’s -31.3.

Eurozone

April’s Industrial Production tumbled 4.1% from March’s +1.5%.

April’s Harmonized Consumer Price Index (HICP) rose by the same rate as it did in March, 5.6% year-on-year.  

Q1 GDP (preliminary) rose 0.1% quarter-on-quarter, in line with expectations and the same as Q4 2022.

May’s ZEW Economic Sentiment Index dropped to -9.4 from April’s reading of 6.4.

China

April’s Industrial Production rose 5.6% year-on-year versus March’s 3.9%; it was expected to increase by 10.9%.

April’s Retail Sales surged 18.4% year-on-year versus March’s 10.6%, the increase was still lower than the expected +21%. 

Japan

March’s Industrial Production improved to -0.6% year-on-year versus February’s -0.7%.

Q1 GDP (preliminary) unexpectedly jumped 1.6% year-on-year versus Q4 2022’s -0.1%; it was projected to rise 0.7%.