The penultimate trading day of April, a month that has been a choppy—and mostly disappointing—one for investors, brings a plethora of news from both the earnings and economic beats. The S&P 500 Index is currently in correction territory, trading 13% below its 52-week high. Most of the recent equity market selling has been led by retreats in the prices of many of the large-cap names that were behind the record highs set in 2021. This trend will place immense scrutiny on the latest results from mega-cap technology titans Apple (AAPL) and Amazon.com (AMZN), to be released after today’s closing bell.
At 8:30 A.M. (EST), we received some mixed data on the U.S. economy. As has been the case for several weeks now, the Labor Department reported encouraging initial weekly jobless claims figures, with the most recent seven-day stretch showing a drop in those applying for unemployment protection. The figure fell from an already low 184,000 to 180,000 in the latest period. However, the initial GDP (gross domestic product) estimate for the first quarter was disappointing. Specifically, the Commerce Department reported that GDP growth came in at an annualized rate of -1.4%, which was a stark contrast to the December-quarter gain of 6.9%. The data, though likely affected by the Omicron variant of the coronavirus spread at the beginning of the period, add to the growing narrative, along with Tuesday’s disappointing reading on consumer confidence from the Conference Board, that the U.S. economy is slowing, hurt by stubbornly high inflation. The GDP report showed an 8% jump in inflation.
The equity futures, which were higher heading into the economic releases, did pull back some on the reports, but are still indicating a constructive start to the trading day stateside. The positive sentiment on Wall Street this morning following Tuesday’s outsized declines and the selling into yesterday’s closing bell that pared most of the day’s gains is being driven by some solid quarterly results, particularly from a number of large technology companies.
The strong results started yesterday afternoon when semiconductor chip supplier Qualcomm (QCOM) beat expectations on both the top and bottom lines and issued an encouraging operating outlook for the remainder of 2022. That report may serve as a brief panacea for the stocks of the chipmakers, which have been punished during the recent technology sector selloff. Likewise, shares of Meta Platforms (FB), the owner of Facebook, are rallying sharply in extended hours trading this morning on mixed results, with investors encouraged by data showing sequential gains in daily active users in each operating region. The social media company also said the slight revenue shortfall was due to the halt of business in Russia. Investors, though, should note that the recent bounce that individual stocks have gotten from earnings has generally not been sustainable. The stock of Microsoft (MSFT), which rallied on strong results yesterday, will be put to the test in the coming days.
The good results are not just coming from the highly scrutinized technology sector. This morning, we also received strong quarterly results from Dow-30 members, fast food giant McDonald’s (MCD), heavy equipment maker Caterpillar (CAT), and pharmaceutical company Merck & Co. (MRK), as well as automobile maker Ford (F). The McDonald’s report showed that the quick-service food operator successfully pushed elevated operating costs onto the customer via higher prices. Conversely, shares of Domino’s Pizza (DPZ) are falling in pre-market action after the company reported drops in both revenues and earnings, citing the ill effects of higher operating costs. For many weeks, we have said that those companies that have pricing power in this high inflation environment will likely perform the best and their stocks may be rewarded by investors. Today’s pre-market reaction to McDonald’s results seems to suggest such.
In general, 2022 has been a very challenging year for all investors. Year to date, both stocks and bonds are in negative territory. It should be noted that equities and bonds have both finished with losses in the same year only four times since 1942 and two of those years were plagued by significant inflationary pressures, much like we are seeing this year. From an equity market perspective, valuations have fallen with worries about a slowing economy, a hawkish Federal Reserve Bank, ongoing supply-chain disruptions, the war in Ukraine, and renewed COVID-19 mandated shutdowns in China creating a “wall of worry” for Wall Street this year. The stocks of the S&P 500 companies, which started the year trading at nearly 22 times earnings, are now changing hands at less than 18 times earnings.
In this volatile trading environment, our recommendation remains that investors look at those companies that produce steady, if not exciting, earnings growth and generate ample cash flow. These companies also typically pay a competitive dividend and have the financial wherewithal to support earnings via share repurchases. Many of the stocks ranked 1 (Highest) and 2 (Above Average) for Safety™ by Value Line are of companies that possess the above mentioned qualities, and the group as a whole has historically fared better than the broader market during turbulent times for the market. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
