Mixed Picture
We finally got a break from having the market narrative being dominated by record inflation, the never-ending pandemic, experimental monetary policy, and the tragic war in Ukraine. Instead, the focus was on corporate earnings, with those companies who delivered solid results being rewarded, and those that disappointed seeing their share prices punished.
Overall S&P 500 earnings growth rate for the second quarter increased to 4.8% from a rate of 4.1% last week and an expected earnings growth rate of 4.0% at the end of the second quarter (June 30). This level of earnings growth would mark the lowest pace since the 4th quarter of 2020, which was during some of the most intense days of the COVID pandemic shutdown.
The Energy sector has accounted for most of the earnings growth and positive earnings surprises. Outside of Energy it has been a mixed picture with 5 of the other sectors reporting year-over-year earnings growth, and five sectors reporting a year-over-year decline in earnings.
The market responded favorably to better-than-expected earnings from Netflix (NFLX), Goldman Sachs (GS), and Tesla (TSLA) early in the week, while stocks dropped on Friday to end a three-session winning streak after weak earnings reports from Snap Inc (SNAP) and Verizon Communications (VZ) offset a strong number from American Express Company (AXP). Despite the pullback at the end of the week, the S&P 500 Index gained 2.6%, the Nasdaq notched a 3.3% advance, and the Russell 2000 bounced 3.6%. Consumer stocks were the top performers, while the Telecommunications sector suffered a double-digit decline. The yield on the 10-year Treasury dropped 15-basis points to end the week at 2.75%, while the yield curve remained inverted with the 2-year at 2.97%. Meanwhile, the fed funds futures market swung around quite a bit all week but settled at an 80% probability that the Federal Reserve’s policy-making committee lifts the benchmark rate by 0.75 percentage points this week. We would be shocked if the Fed raised rates by the full one percent as evidence of a slowing economy is becoming more prevalent. For example, the Labor Department reported that new claims for jobless benefits rose to the highest since November last week, suggesting cooling in the labor market. Additionally, U.S. business activity contracted for the first time in nearly two years in July as a sharp slowdown in the service sector outweighed continued modest growth in manufacturing, S&P Global on Friday said its preliminary – or “flash” – U.S. Composite PMI Output Index had tumbled far more than expected to 47.5 this month from a final reading of 52.3 in June; a reading below 50 indicates business activity had contracted.
Across the pond, the E.C.B raised rates by 50 basis points to 0%, its first hike in 11 years. Now, with both the U.S. Federal Reserve and the E.C.B. raising interest rates, more than 40% of the world economy is in a tightening mode. This should take some stress off U.S.-based companies with international operations, some of which (e.g., MSFT and JNJ) which have recently revised earnings projections lower due to the strong U.S. dollar. The Euro recently reached its lowest level versus the dollar in 20 years amongst a deluge of problems and non-competitive interest rates. European equities have tread water for the last 5 years and are trading at very low P/E multiples with large dividends. As such, we have included EFV (iShares MSCI EAFE Value ETF) in our equity index model. Please feel free to contact us if you are interested in that strategy.
Finally, according to AAA, U.S. average gas prices continued to decline to $4.366 per gallon (as of Sunday, July 24, 2022) from $4.532 per gallon a week ago and from $4.926 one month prior. On the margin, this is positive for consumer spending, but the trend will need to stay downward into the fall and winter for sustained consumer spending optimism to develop.
Ramp Up
It is the busiest week of earnings season, with 175 S&P 500 companies scheduled to report results for the second quarter.
As previously mentioned, the FOMC will announce its monetary policy decision on Wednesday, with a 75-basis point hike widely anticipated. With the recent data indicating the early signs of an economic slowdown, investors will be hyper-focused on whether the Fed see signs of inflation also easing.
The Conference Board release its Consumer Confidence Index for July on Tuesday, which will give us a reading on whether the recent downward trend in gasoline prices sparked any optimism.
Speaking of optimism, the White Sox look poised to move up the standings in August, while Cubs fans fortunately can continue enjoying outings to Wrigley Field regardless of the final score.
Stocks on the Move
-24.9% Healthcare Services Group Inc (HCSG) provides housekeeping, laundry, linen, facility maintenance, and food services. The Company offers its services to the healthcare industry, including nursing homes, retirement complexes, rehabilitation centers, and hospitals. Last week, HCSG reported second quarter earnings per share of $0.09 and revenue of $424.86M missing consensus estimates by $0.04 and $2.36M, respectively. The top- and bottom-line miss was attributed to the “timing of notes receivables with certain clients.” By the end of the fiscal year, the company anticipates its key metric, cost of services, to be “in line with (their) historical target of 86%.”
-12.4% Horace Mann Educators Corporation (HMN) is a holding company for insurance subsidiaries that market and underwrite personal lines of property and casualty insurance products, life insurance products, retirement products, and employer-sponsored benefit products primarily to K-12 teachers, administrators, and other employees of public schools and their families. Last week, Piper Sandler cut its price target for Horace Mann after it preannounced significantly lower 2022 guidance due to the level of storm activity and catastrophe losses.
-12.4% Unitil Corporation (UTL) conducts a combination electric and gas utility distribution operation in north central Massachusetts and electric utility operations in the seacoast and capital city areas of New Hampshire. The Company is also involved in energy planning, procurement, marketing, and consulting services. Last week, Bank of America analyst Julien Dumoulin-Smith downgraded UTL to Underperform as the stock has recently had a run-up on good news and thus has become expensive versus its small-cap utility peer group.
+18.4% Value Line Inc (VALU) produces investment related periodical publications. The Company also provides investment advisory services to mutual funds, institutions, and individual clients. All total, Value Line collects data and provides analysis on around 7,000 stocks, 18,000 mutual fund and 200,000 options. Last week, Value Line declared its regular quarterly dividend of $0.25 per share.
+12.9% Blue Bird Corporation (BLBD) designs and manufactures school buses and commercial buses for school districts, large national fleets, businesses, government agencies, and non-profit organizations. There was no significant company news last week.
+10.9% Boot Barn Holdings Inc (BOOT) sells western and work gear for individuals and families. The Company sells boots, jeans, shirts, hats, belts, jewelry, and other accessories. There was no significant company news last week.
+12.3% Ethan Allen Interiors Inc (ETD) designs, manufactures, sources, sells, and distributes a range of home furnishings and accessories. Through its portfolio of ten furniture factories, one sawmill, one lumberyard, as well as 300 Ethan Allen Stores, the Company offers a variety of products including beds, dressers, tables, chairs, buffets, entertainment units, home office furniture, and wooden accents. There was no significant company news last week.
+11.5% Evolution Petroleum Corporation (EPM) explores for and produces oil and gas. The Company focuses on acquiring established oil and gas fields and applying specialized technology to increase production rates. There was no significant company news last week.
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.