Weekly Digest
Wall Street ends July with its best performance since 2020
Big tech earnings remain in the spotlight, Nasdaq posts its best month since April 2020
Wall Street is all up and roaring again- ending the month of July on a strong note after a dismal first-half performance. In the biggest earnings week of the quarter, the big tech results helped shift investor focus from disappointing GDP data, accelerating inflation and the highly anticipated Federal Reserve rate hike.
The upbeat outlook from Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT) and the robust Google (GOOGL) ad-sale numbers reassured investors that the large-cap tech stocks would be able to manoeuvre well through the uncertain times.
While Amazon shares jumped about 26% in July in their biggest climb since October 2009, Apple shares surged over 18% in their best monthly move in nearly two years. The rally in tech stocks led to Nasdaq posting its biggest monthly gains of 12.3% since April 2020.
July was a reminder of the old saying that “market is not the economy and the economy is not the market”. Even when the U.S. economy unexpectedly contracted in the second quarter, the S&P 500 added over 9% for July, its best month since November 2020.
Markets had already factored in the Fed’s 75 basis points rate hike and the negative effects of a tight monetary policy on the American economy. Investors are now expecting the Fed to raise rates at a less aggressive pace due to the declining GDP.
For the week, the S&P 500 ended higher with a reasonable climb of 4.2%, the blue-chip Dow by nearly 3%, and the tech-heavy Nasdaq Composite gained the most, by 4.7%.
Top Stories
It’s raining profits for oil producers Exxon & Chevron
Skyrocketing fuel prices must be burning a hole in your pocket, but they are surely helping the top U.S. oil companies make a lot of money. Exxon Mobil Corp (XOM) and Chevron Corp (CVX) reported record-breaking profits in the second quarter of 2022.
Chevron posted $11.62 billion of profits in the quarter, way above the $3.08 billion reported in the year-ago period. Chevron’s earnings and revenues both topped market expectations.
On the other hand, Exxon’s quarterly profits almost quadrupled to $17.9 billion, beating the oil major’s previous record from 2012.
While rising oil and natural gas prices boosted profits, the oil majors also maintained tight cost controls.
Snap Summary
Chevron shares climbed 8.9%, and Exxon shares gained 4.6% in the post-earnings trading session. The energy sector is the top-performing group so far this year- up about 42%.
However, fear of an imminent recession and its possible effect on demand for energy dragged the sector 18% down from its multi-year high in June.
Since energy costs have been the major contributor to the decades-high inflation in the United States, record profits from oil producers are likely to draw further criticism from the Biden administration. In the companies’ defence, labour and equipment shortage hampered the increase in fuel supply.
Oil giants are using the excess cash to satisfy investors looking for bigger returns. In a race for aggressive share buyback programmes, Chevron raised its annual buyback plans to $10 billion to $15 billion, from the prior $5 billion to $10 billion.
Earlier in the year, Exxon more than doubled its buyback program to $30 billion in 2022 and 2023.
Timing crude oil prices is always tricky and investors should be wary of that before making any investment decisions seeking short-term gains.<
JetBlue jets off to become the 5th largest U.S. air carrier
After a typical corporate bidding war, JetBlue Airways Corp (JBLU) has emerged as the winner to buy budget carrier Spirit Airlines Inc (SAVE). The $3.8 billion deal, if approved, would make JetBlue the fifth largest carrier in the United States.
The announcement came after Spirit cancelled its plans to merge with another ultra low-cost carrier Frontier Airlines (ULCC) due to a lack of shareholder support.
As per the deal, JetBlue will pay $33.50 in cash for each of Spirit’s shares. This includes a pre-payment of $2.50 a share upon approval from Spirit shareholders and a ticking fee of 10 cents per month beginning January, 2023 until the deal closure.
JetBlue expects to fast-track its growth by getting access to more Airbus jetliners and pilots through the merger. The combined entity would have over 1,700 daily flights with a fleet of 458 aircraft.
Snap Summary
The JetBlue-Spirit deal is the first significant U.S. airline merger since Virgin America’s acquisition by Alaska Airlines (ALK) in 2016. Analysts also see room for further consolidation among smaller airlines in the industry.
The deal comes at a crucial time for the airline sector when the pent-up demand for travel, high fuel prices and a tight labour market have shot up airfares tremendously.
Frontier shares jumped 20% and Spirit shares rose 5.6% after the deal announcement while JetBlue shares remained flat. Spirit shares are up about 10% so far this year.
Even though JetBlue has been successful in snatching Spirit away from Frontier, a bigger challenge from the U.S. regulators lies ahead. Joe Biden has called out the lack of competition in the airline industry. As a result, the Justice Department has been on the lookout for anti-competitive deals.
While the deal is expected to close in the first half of 2024, there is a good chance that the regulators may not approve of it.
$52.7 billion package passed for U.S. chip production
The U.S. Congress passed one of the most-awaited bills last week to boost semiconductor chip production in the United States. The Chips and Science Act of 2022 includes a $52.7 billion package for companies manufacturing chips in the country and a tax credit for investment in chip production.
The package also provides funding for the innovation and development of other U.S. technologies.
The bill is aimed at reducing U.S. tech companies’ dependence on Asian chip foundries and easing a looming chip shortage in the industry. Companies from Taiwan, China, and South Korea account for roughly 90% of the global foundries market.
President Joe Biden who is expected to sign the legislation said, “ The bill will lead to more resilient American supply chains, so we are never so reliant on foreign countries for the critical technologies that we need for American consumers and national security.”
Snap Summary
The bill, no doubt, is a victory for chip manufacturers like Intel (INTC), GlobalFoundries (GFS), Texas Instruments (TXN) and Micron Technology (MU) that design and produce their own chips. They will benefit from the subsidies and tax credits of the bill.
But it will do very little to support chip designers like Advanced Micro Devices (AMD), Qualcomm (QCOM) and Nvidia (NVDA) that outsource most of their chip production to foundries like TSMC (TSM) and Samsung.
However, the bill will incentivise these Asian chip fabricators to establish their production facilities in the United States who had already announced such plans contingent on the passing of this bill.
While smartphone-driven demand for chips might be cooling off, TSMC and Samsung earlier in July posted bumper quarterly profits on the back of higher demand for advanced chips used in data centres and electric vehicles.
