The broader stock market averages fell sharply across the board on Friday, as trading volatility was elevated around the expiration of monthly options contracts.
The S&P 500 index lost 5.7% during the holiday-shortened week, while the Nasdaq Composite declined 7.6%. The latter index, which is dominated by high-growth companies, experienced its worst week in nearly two years.
There was no singular catalyst for the drop, but the selling pressure in the early days of 2022 does appear to be influenced by valuation. The S&P 500 Value Index is down just 3.2% year-to-date, while the S&P 500 Growth Index has fallen 11.8%.
The Week Ahead
Bulls will be looking for solid earnings as a potential catalyst for a near-term market rebound. According to Refinitiv, aggregate S&P 500 profit is expected to increase 23.7% in the fourth quarter of 2021, bolstered by the Energy sector.
More than 20% of the companies in the S&P 500 are on tap to post quarterly results this week. Some key reports on the docket include:
Jan. 25: Johnson & Johnson (JNJ), Microsoft (MSFT), and Verizon (VZ)
Jan. 26: Boeing (BA), Intel (INTC) and Tesla (TSLA)
Jan. 27: Apple (AAPL), McDonald’s (MCD), and Visa (V)
Jan. 28: Caterpillar (CAT) and Chevron (CVX)
Next week will also be busy on the economic front, beginning with the preliminary January purchasing managers’ index (PMI) data on Monday. Tuesday brings a look at Consumer Confidence, followed by the FOMC’s next interest rate decision on Wednesday.
While the Federal Reserve is largely expected to keep interest rates unchanged this week, Fed funds futures are pricing in a 93% likelihood of an increase by the March 16 meeting.
Thursday offers the first reading of U.S. GDP growth in the fourth quarter of 2021, where economists are calling for a 5.4% increase. Finally, Friday brings the core PCE price index, which is the Federal Reserve’s key inflation measure.
Following the snap-back recovery in stocks over the past several quarters from Pandemic lows, we believe that investment gains will be harder to come by in 2022, given a slowing growth outlook and the prospect of higher interest rates.
As a result, deciding what and when to buy can be challenging for any investor. However, the fact remains that attractive investments are out there if you’re willing to dig a little deeper. One such Technology name is worth a closer look and is our Stock of the Week.
Stock of the Week: VMware (VMW)
The company makes virtualization technology used in cloud computing. The stock declined fractionally in the midst of last week’s sharp selloff and we believe this relative outperformance can continue in the early months of 2022. Here’s why:
Keybanc initiated coverage of VMware on Wednesday, with an Overweight rating. Analyst Thomas Blakey set a $164 price target, reflecting 32.5% upside potential.
In a market where investors are once again paying close attention to valuation, the stock appears inexpensive at just 17.5x expected earnings over the next 12 months.
The company is also growing, as was evidenced by the better-than-expected quarterly results that management delivered last November.
VMware earned $1.72 a share in the October quarter, as revenue increased 11% from a year ago, to $3.19 billion. Upside in the period was driven by 25% higher subscription sales. The company also generates solid free cash flow, which it returns to investors through a $2 billion repurchase program.
In the meantime, the stock carries a Smart Score of 8/10 on TipRanks. This proprietary score utilizes Big Data to rank stocks based on 8 key factors that have historically been a precursor of future outperformance.
On top of the positive aspects mentioned already, the Smart Score indicates that shares have seen improving sentiment from hedge funds and financial bloggers.
FYI: This is just 1 of the 20+ stocks selected for the Smart Investor portfolio. That’s where we share more detailed insights on our weekly stock picks.
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