Julex Weekly Market Review – August 25, 2023

Markets finished mixed this week.  The Dow fell .53%, while the S&P 500 increased .58% and the Nasdaq Composite gained 1.82%.

Earnings Reports

Nvidia shares spiked 7% after a quarter in which the chip-maker generated $13.51 billion in revenue, a year over year increase of 101%.  Additionally, the company’s Q3 forecast also greatly beat expectations, with a projected $16 billion in sales, a 170% year over year jump.  Much of the growth came from its  highly profitable data center business whose customers include tech giants such as Alphabet and Meta.  The adjusted gross margin jumped 25.3% to 71.2%.  These extraordinary results are largely driven by the demand for AI-focus chips. 

Nvidia’s astronomical earnings had a large ripple effect.  Many big tech companies who have a partnership with Nvidia also benefited.  Alphabet shares jumped to the highest  since April 2022 due to Nvidia’s partnership with Google Cloud.  In contrast, some competitors saw losses.  Advanced Micro Devices(AMD) dropped up to 8%, ending the week down 3.71%.  

Peloton shares tanked 22% after the fitness company lost $242 million, far more than expected.  Although the revenue slightly exceeded projections, the seasonality of the business led to lower revenue in the quarter. The number of subscribers fell by 29,000.  A recall of bike seat posts in May also led to $40 million in losses as well as a loss in free cash flow.  The company barely reached positive free cash flow during the quarter, but expects to go negative over the next two quarters.  

Retail Earnings Disappointed

Numerous retailers reported their earnings this week. Many of them reported significant losses in unexplained inventory shrink possibly due to theft.  This follows earlier trends from other retailers such as Target and Home Depot.  The increase in theft is believed to stem from a worsening economy, as well as lax law-enforcement.  Additionally, there continues to be sector-wide concerns about an economic slowdown.  Many companies may have to cut the prices of discretionary items  due to lower demand.  

Dick’s Sporting Goods shares plummeted 22% as the company reported net income of $244 million, down 23% year over year and below analysts’ expectation. .  The sports retailer attributed about a third of the merchandise margin decline to inventory shrink.  Additionally, the company cut prices on many products amid a decrease in demand for outdoors products.  Dick’s also cut yearly guidance.  

Foot Locker stock plunged 28% after the sporting goods retailer saw a 9.9% dip in sales during Q2, and a net loss of $5 million.  Additionally, the company will halt quarterly dividend payouts beyond October in an effort to conserve cash.  Similar to rival Dick’s, much of the loss was blamed on inventory shrink, and the retailer also cut yearly guidance.  

Macy’s shares lost 14%. The legacy retailer beat revenue and net income expectations, but warned of a strained consumer base through the rest of the year. Higher interest rates and the resumption of student loan payments are likely to hurt the consumptions.  Macy’s stock is down almost 40% YTD in 2023.

Dollar Tree shares dropped over 12% as the discount retailer reported a weaker-than-expected Q3 outlook, largely because of consumers shifting away from discretionary items and an increase in inventory shrink.  The company has announced measures to stop theft. The CEO, Jeff Davis, does not see “any trouble getting to more realistic margin levels.”  

Lowe’s exceeded expectations in net income, but missed revenue expectations.  Similar to rival Home Depot, Lowe’s has seen decreases in demand and net sales from a pandemic-era boom, and is now warning of further slowdowns amid high interest rates and decreasing consumer confidence.  This also entails a decline in the purchases of big ticket items, with home improvement projects becoming smaller.  

S&P Global Downgrades Some Bank Ratings

Similarly to fellow rating agency Moody’s recent downgrades, the moves in part concern higher interest rates, as well as the commercial real estate (CRE) exposures of these firms, as CRE assets are particularly vulnerable to a recession.  While the downgrades mainly concerned regional lenders such as Associated Banc, Valley National, and Comercia, larger banks saw ripple effects in share prices.  

Boeing Reports 737 Max Defect

The plane-manufacturer found improperly drilled holes in the aft pressure bulkhead, resulting from a quality issue with fuselage-supplier Spirit AeroSystems.  This comes after Boeing reported that Spirit had improperly installed brackets between the fuselage and the tail in April.  Spirit stated that it will continue supplying Boeing, and that the issue is only related to some aircrafts.  Although it does not affect flight safety,  the issue will impact near-term deliveries amid a travel boom.  Boeing is unsure about its year-long forecast, but the defect will at least delay an August 28th delivery to Malaysian Airlines.  Boeing shares fell 2.7%, while Spirit AeroSystems tumbled 6.1%.  

Fed Chairman Powell Speech

In his speech Friday, Federal Reserve chairman Jerome Powell reiterated the need to reduce inflation, although not with the same hawkish sentiment as a year prior.  His speech invoked many to predict a further rate hike this year, as the continued economic growth despite high rates “could warrant further tightening of monetary policy.” He emphasized this point by stating “it is the Fed’s job to bring inflation down to our 2% goal, and we will do so.”  

Powell did not mention the possibility of a rate cut like others at the conference, stating his intent to “hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”  Many economists now believe a possible rate cut would not occur until at least mid 2024.  

Many still believe it is unlikely that the Fed will increase rates at the September meeting, though a rate hike this year is seen as probable. All three major indexes finished the day up.  

United Auto Workers’ Union Authorizes Strike

97% of voting members supported a strike authorization, which involves the September 14th conclusion of a four-year contract between the union and the Detroit Three automakers: General Motors, Ford, and Stellantis.  Union demands include a 46% wage hike, equal wages, cost-of-living adjustments, and defined-benefit pension plans for new hires.  Union president Shawn Fain has stated no plans for an extension to the September 14th deadline.  The Detroit Three have stated their desire for a fair deal that allows them flexibility to manufacture less labor-intensive electric cars.  

Next Week

Earnings reports will include Best Buy, UBS, Lululemon Athletica, Dell Technologies, Dollar General, and Campbell Soup.

The August nonfarm payrolls report will be released Friday-the unemployment rate is expected to remain at 3.5%.  

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