Retailers Posted Mixed Results As Investors Await Chipmaker Nvidia Earnings, Powell Speech

(Wednesday market open) Investors hoping for a rebound this week from a rough first half of August had to tap the brakes Tuesday as disappointing earnings from big retailers combined with bank rating downgrades to dampen the market mood.

Still, stock futures based on the S&P 500® index (SPX) and the Nasdaq Composite® (COMP) rose modestly in overnight trading. Focus on Wednesday shifts back to the tech sector as chipmaker Nvidia NVDA is expected to report earnings today after the close.

Earnings news so far Wednesday brought mixed results from retailers. Foot Locker FL shares dropped sharply in premarket trading after reporting weaker-than-expected earnings. Kohl’s KSS, by contrast, reported better-than-expected earnings.

But earnings are likely to be shunted to the back seat as investors wait for Federal Reserve Chairman Jerome Powell’s Friday address at the Jackson Hole Economic Symposium. Powell’s speech will be scrutinized for clues to the Fed’s next moves on interest rates. A string of stronger-than-expected economic readings recently stirred concern that the Fed may not be done with its rate-hike cycle.

Investors are also watching Treasury yields, with the 10-year note remaining near 16-year highs of around 4.35% posted on Monday. Continued upside could further pressure equities, particularly in the tech sector. 

Morning rush

• The 10-year Treasury note yield (TNX) was down about 7 basis points at 4.28%
• The U.S. Dollar Index ($DXY) was up 0.40 at 103.97
• Cboe Volatility Index®(VIX) futures were down 0.16 at 17.75
• WTI Crude Oil (/CL) futures were down $1.20 at $78.44

Stocks in spotlight

Mixed bag: Retailer earnings so far this week kept with a common theme: some positive surprises but several misses.

• Shares of Macy’s M and Dick’s Sporting Goods DKS tumbled sharply Tuesday following disappointing numbers, though shares of home improvement chain Lowe’s LOW gained after reporting better-than-expected results.
• Kohl’s shares rose Wednesday morning in premarket trading after the retailer reported earnings per share (EPS) of 52 cents for the second quarter—more than double Wall Street expectations—though sales were slightly under forecasts and down 4.1% year-over-year. The company reaffirmed its full-year earnings and sales forecasts.
•  Foot Locker’s stock price plunged after the company reported a loss of 68 cents per share and a 10% decline in sales. The company also cut its full-year sales guidance. CEO Mary Dillon cited a “still-tough consumer backdrop” and “softening trends in July,” according to a statement.
• Retailers continue to struggle with trimming excess inventory and “shrinkage” due to theft, while shoppers appear to be increasingly gravitating toward lower-cost options, says Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research.

The retailer earnings picture “says as much about the consumer as it does about companies,” Kevin says. “On the consumer side, it’s clear that people are ‘trading down’ to less expensive options. On the company side, there are multiple headwinds, not least being inventory drawdown issues, worsening pricing power, and a difficulty in forecasting the macro environment.”

Tech watch: Nvidia’s results after Wednesday’s close will be of keen investor interest. The chipmaker was the top performer in the S&P 500® Index (SPX) in the first half of the year, up 179% amid escalating bullishness over companies that make semiconductors and other technology capable of processing increasingly sophisticated artificial intelligence. Another tech company, Snowflake SNOW, is also expected to report results after the close.

Under pressure: Further gains in yields could keep equities under pressure if investors increasingly seek out risk-free Treasuries over riskier stocks, particularly in the tech sector, Kevin says. The recent upside breakout in Treasury yields weighed on equity “multiples,” which have been expanding since last fall without the benefit of earnings growth, Kevin notes. Earnings growth has not kept pace with stock prices, in other words.

“The pressure has been more acute on the more richly valued mega-cap tech and tech-oriented stocks,” Kevin says. “Some reversal is likely needed to establish a better footing for stocks. Better-than-expected recent economic activity, coupled with sticky inflation, is likely to keep uncertainty regarding Federal Reserve policy elevated.”

What to watch

Economic reports expected later this morning include July New Home Sales and the preliminary July S&P Global U.S. Purchasing Managers Index (PMI), a gauge of manufacturing and services activity.

Housing numbers released on Tuesday further underscored how surging mortgage rates have pushed potential home buyers to the sidelines. Sales of previously owned homes in July were down 2.2% from June and down 17% year-over-year.

For new home sales, analysts expect a July total of about 705,000, according to a consensus estimate from Briefing.com. Such a figure would be up from a seasonally adjusted annual rate of 697,000 in June.

Other economic reports this week include Durable Goods Orders from the Census Bureau on Thursday, and August University of Michigan Consumer Sentiment numbers on Friday.

Eye on the Fed

Investors widely expect the Fed to hold its benchmark funds rate unchanged for at least another month. Early Wednesday, the market pegged odds that the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, will hold rates unchanged following its September 19–20 meeting at nearly 87%, down from slightly from a week ago, according to the CME FedWatch Tool.

The market’s sense of Fed policy beyond September has grown cloudier as a string of stronger than expected economic numbers over the summer fueled ideas that another rate hike—which would be the 12th since March 2022—could still be in play. Expectations the funds rate would remain at its current 5.25%–5.50% target range after the FOMC meeting in October were about 59%, down from 69% a month ago.

CHART OF THE DAY: YIELD PINCH. Dividend investors may be feeling the pain from rising yields. As the 10-year Treasury yield (TNX—candlesticks) has risen 44% over the last year, dividend stocks have struggled. The Dow Jones U.S. Dividend Index ($DJDVP—pink) has fallen about 11%, while the Utilities Select Sector ($IXU—blue) and the Real Estate Select Sector Index ($IXRE—red) have tumbled nearly 18% over the previous 12 months. As bond yields rise, they become more enticing to income investors because they’re usually considered safer than stocks. If yields continue to rise, income stocks may continue to fall. Data Sources: ICE, S&P Dow Jones Indices. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

 

Thinking cap

Ideas to mull as you trade or invest

Supply chain woes hamper chemo drugs: Many prescription drugs have been in short supply for some time, but the shortages are growing increasingly concerning for chemotherapy drugs and other treatments for cancer patients, according to MIT Technology Review. Many pharmaceuticals sold in the U.S. are made overseas, and the recent cancer drug crisis stems from an incident at a plant in India last fall. In November, the U.S. Food and Drug Administration toured an India-based facility owned by Intas Pharmaceuticals. Inspectors observed numerous quality control and data integrity violations, and as a result, the plant halted production. “It was the first domino to fall in a chain that would lead to a nationwide shortage of cancer therapy drugs,” MIT Technology Review reported. “For cancer patients, shortages could mean the difference between life and death.” Before the shutdown, Intas produced about 50% of the U.S. supply of cisplatin, a common cancer drug used to treat testicular, ovarian, bladder, head and neck, lung and cervical cancers. Other manufacturers were unable to ramp up enough to avoid a shortfall. AI and other technology could help the healthcare supply chain respond faster to shortages, but tech fixes won’t address the root of the problem, as generic manufacturers need more incentives to focus on quality, not just cost, MIT reported.

Gen-Xers worried about retirement: Many members of so-called Generation X, those born roughly between 1964 and 1980 are approaching retirement age but face a dilemma: they don’t have enough money saved. Only one-third of employees ages 43-58 have a retirement strategy in place, and 35% have less than $10,000 set aside for their retirement, Employee Benefit News reports, citing a recent survey by Prudential. “Compared to previous generations, the 65 million members of Gen X are facing an especially daunting task of building their retirement savings, and many are woefully underprepared,” the report says. “Not surprisingly, 82% of Gen Xers said they are not confident they will be able to fully retire, or already anticipate working part-time once they leave their jobs.” Gen-Xers feel like they’re behind the 8-ball for a few reasons. Changes to retirement plans, including less access to traditional vehicles like pension plans, along with a more volatile economy, “have put Gen X employees in a very different circumstance than their Baby Boomer peers,” say Dylan Tyson, president of retirement strategies at Prudential, according to the report.

New home building boom: One subplot to the ongoing housing industry/interest rate narrative involves the surging market for new homes. New homes accounted for 31.4% of for-sale housing units from April through June, a record for the second quarter and a reflection of the scarcity of existing home supplies, National Mortgage News reports, citing Redfin. By comparison, new homes represented just 17% of for-sale inventory in the second-quarter of pre-pandemic 2019. Pandemic-related factors “are propping up new-home numbers, even as builders are producing a smaller number of units compared to a few years ago,” National Mortgage News reports. Also, higher interest rates have resulted in a “lock-in” effect, with homeowners hesitant to move to take out a new mortgage at current levels and leaving the existing-sales market sluggish. “Builders are still building but homeowners aren’t selling, so new construction is the only option for many buyers,” says Shauna Pendleton, a Redfin agent in Boise, Idaho, according to the report.

Calendar

Aug. 24: July Durable Orders and expected earnings from Dollar Tree (DLTR) and Gap (GPS)

Aug. 25: Fed Chair Powell speaks at Jackson Hole Summit, and final August University of Michigan Consumer Sentiment

Aug. 29: June S&P Case-Schiller home price index, August Consumer Confidence Index and expected earnings from Best Buy Co. (BBY), Big Lots (BIG), Box, Inc. (BOX) and HP Inc. (HPQ)

Aug. 30: August ADP employment and revised Q2 Gross Domestic Product

Aug. 31: Weekly Initial Jobless Claims, July Personal Consumption Expenditures (PCE) price index, July Personal Income and Spending, August Chicago Purchasing Managers Index (PMI) and expected earnings from Dell Technologies (DELL), Dollar General (DG), Hormel Foods (HRL), Lululemon Athletica (LULU) UBS AG (UBS)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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