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Major banks are the start of quarterly results. (0:17) Consumer inflation is expected to fall annually. (3:10) The big thing about Nvidia. (5:37)
The following is an abridged transcript:
This week brings the last consumer inflation figures before the Fed meets at the end of the month, but corporate earnings will like drive market momentum.
The broader market continues to rally but concerns about the breadth of the rally and valuation of the top stocks driving it continue.
Goldman Sachs equity strategist David Kostin said: “We expect the magnitude of EPS beats is likely to diminish as consensus forecasts set a higher bar than in previous quarters.”
“Analysts forecast the mega-cap AI firms will post sales growth of 17% in 2Q year/year. Over a 12-month period, high-growth stocks with elevated multiples historically generated roughly the same 10 pp reward as low-multiple stocks when beating estimates. However, growth stocks with high valuations lagged the median firm by 32 pp when they failed to meet sales estimates, 2x the underperformance of lower multiple stocks.”
Leading earnings this week are the banking stocks. All 31 major banks just passed their Fed stress tests. Friday brings reports from Citigroup (C), JPMorgan Chase (JPM), Bank of New York Mellon (BK) and Wells Fargo (WFC).
“Investors have no reason to change their bullish outlook on Wells Fargo,” according to Chris Lau, who leads the DIY Value Investing Group – and you may know from the comments sections of my Wall Street research stories.
Lau says Well Fargo”hiked its dividend and will buy back stock. This increases the attractiveness of the stock, especially as the Fed prepares to cut interest rates this year. After building support in the $40s since 2021, the uptrend that began last Nov. 2023 is unlikely to end. Helped by strong quarterly results, that sets up a rally to over $65, a price not seen since Jan. 22, 2018.”
In addition to the banks, Delta (DAL) and Pepsi (PEP) weigh in on Thursday.
Delta continues to benefit from a premium consumer mix as a best-in-class operator, with diversified revenue and cash streams. Analysts are looking for Delta to reiterate its 2024 guidance for EPS of $6.00 to $7.00 and free cash flow of $3 billion to $4 billion. Options trading implies a share price swing of 6% after the report.
Pepsi’s organic sales are seen rising by 3%, led by a strong performance in the Europe and Latin America regions. Volume is seen up 4.1% to offset a 1.1% decline in pricing.
UBS says that although the stock has largely traded sideways to start the year, the firm’s crowding analysis points to the stock being a crowded long and conversations would suggest sentiment remains negative heading into results due to concerns about challenging U.S. trends.
Other earnings this week include Greenbrier (GBX) on Monday. Helen of Troy (HELE) and Kura Sushi (KRUS) report Tuesday. Manchester United (MANU) – full of executives and short on players so far — and PriceSmart (PSMT) weigh in on Wednesday. Conagra Brands (CAG) joins Pepsi and Delta on Thursday, which is also inflation day.
The June consumer price index is expected to have risen 0.1% on the month, bringing the annual rate down to 3.1%. The core CPI is forecast for a 0.2% rise.
Morgan Stanley says both the CPI and the PCE have confirmed solid economic growth of 2%, which “amounts to a pretty comfortable soft landing.
“While markets may be wringing their hands over a slowdown, from the Fed’s perspective it would be most welcome,” chief global economist Seth Carpenter said. “In fact, a slowdown at least as big as we expect is probably seen as necessary within the Fed to achieve its goal of extending the current cycle while bringing inflation down.”
“After a lull in the (1990s) economy and a very shallow reversal from the Fed, the economy continued to grow for the rest of the decade. Currently, the market is pricing in cuts, and we actually expect a bit more than is priced, but like the 1990s, we think the cutting cycle will be shallow. Investors hoping for a “late cycle” scenario that turns to a rebound where rates are slashed by several hundred basis points may be in for some disappointment.”
In the news this weekend, casino operators on the Las Vegas Strip have a near-term earnings catalyst on the horizon, with the closing of the Tropicana Las Vegas and The Mirage Hotel & Casino representing a 4.9% combined reduction in total room supply on the Las Vegas Strip.
The AP notes that when the Tropicana opened in 1957 it was the most expensive and lavish casino on the Strip.
Nicknamed the “Tiffany of the Strip” it cost $15 million to build, with 300 rooms split into two wings, creating a footprint shaped like the letter “Y.”
Behind the scenes, it had ties to mobster Frank Costello and has been a pop culture staple. It served as the location of Moe Green’s hotel in “The Godfather” and in “Diamonds Are Forever,” James Bond says “I hear that the Hotel Tropicana’s quite comfortable.”
CBRE Equity Research analysts said the Mirage is the more meaningful contraction. “We estimate that The Mirage had ~1mm occupied room nights and generated $596M of revenue and $169M of EBITDAR in FY23. This represents significant underlying demand for the Las Vegas Strip that will need to find a home.”
Looking to the markets, stocks are coming off their best week since April, with heavyweight Nvidia (NVDA) snapping a two-week losing streak.
Seeking Alpha’s Rena Sherbill spoke to Jonah Lupton, who runs the Fundamental Growth Investor Investing Group.
“I don’t even know what to make of NVIDIA. I mean, I don’t think we know what the next three, four, five years is going to look like for artificial intelligence. We don’t know their specific roadmap. We don’t know what competitors might be coming down the pipeline with their own chips.
I mean, we’ve all heard stories about the hyperscalers like Google (GOOG) (GOOGL), Microsoft (MSFT), they’re going to want to build their own chips, okay, it sounds good. I don’t know if they’ll actually be able to do it.
And then how will those chips compare to whatever the newest, greatest NVIDIA chip is? And if they’re building their own chips, are they going to save enough money by using an inferior chip to justify not using the best NVIDIA chip? Like, I don’t know.
I mean, China, ByteDance (BDNCE) is apparently trying to develop their own chips now. I just — it’s wild. I just don’t think, I think if you believe in artificial intelligence, I just think this is the one stock that you have to own and you can’t try to trade in and out of it because it’s going to do things like this, down 6% one day, up 8% the next day.
Thank God, I started buying it a year ago when it gapped up on that earnings report. Even though I didn’t fully understand the importance of H100s and where that would lead us.
But now, I mean, you listen to these earnings calls from all the hyperscalers and all they talk about is trying to get their hands on as many H100s as possible, or H200s and the new BGs that are coming out. I mean, Tesla (TSLA) is getting ready to build a supercomputer with Dell (DELL) and Super Micro with tens of thousands of H100s. Like – it’s like an arms race, which company can buy the most H100s.
And then I don’t even know what’s going to happen in two or three years. Let’s just say Meta (META) has 10,000 H100s. At what point do they have to upgrade? And then what do they do with the H100? Do they sell them off for $0.50 on the $1 or do they keep them and go buy whatever the new chip is? I don’t know. It’s going to be very interesting to play out. I just think if you believe in artificial intelligence and LLMs, and I just think NVIDIA is still the best way to play it.”
And in the Wall Street Research Corner, Wells Fargo says the boom in AI sets up companies focused on natural gas as trend winners.
Midstream energy companies focused on natural gas should be visible long-term beneficiaries from the build out of data-center capacity in the U.S. to run AI operations, analyst Ian Mikkelsen said. About 43% of electricity is generated from natural gas and the build-out of energy-hungry data centers is in very early stages.
“We believe that U.S. natural gas production capacity and reserves are sufficient to meet growing demand, with infrastructure being the key constraint in balancing supply with this demand growth over time,” he said. “We expect this to provide midstream companies with incremental growth opportunities and higher utilization of existing assets, ultimately extending the terminal value of natural gas infrastructure.”
