Wall Street snaps four-week winning run on rate hike fears

Economic data last week gave mixed signals; focus to remain on Jackson Hole conference this week

Investor hopes for a less aggressive monetary policy stance were dampened as comments from St. Louis Federal Reserve President James Bullard indicated that the Fed would likely continue hiking rates in the near term. As a result, all three major indexes ended the week lower, paring gains from the previous weeks.

A host of economic data last week painted a mixed picture of the U.S. economy, showing resilience in consumer spending with some signs of trouble brewing.

While a fall in fuel prices gave consumers some respite in July and lifted sentiment, the once-thriving housing market is getting weaker.

After Germany posted a record-high rise in monthly producer prices, U.S. 10-year Treasury yield climbed to near the 3% mark.

For the week ahead, investors will be looking out for cues on the economic outlook from Fed Chair Jerome Powell’s speech at the Jackson Hole conference. 

Snapping the four-week winning streak, the S&P 500 shed 1.2%, the blue-chip Dow fell 0.2%, and the tech-heavy Nasdaq Composite declined the most, by 2.6%, last week.

Top Stories

Dividend on the way for General Motors’ shareholders after a gap of over two years

General Motors (GM) would restore quarterly dividend after a break of more than two years and raise its share repurchase program to $5 billion, the company said on Friday.

GM suspended dividend payout and share buybacks in April 2020  as the automaker had to preserve funds during the early stages of the COVID-19 crisis. 

The news indicates management’s confidence as the worst of the pandemic seems to be left behind. Chief Executive Officer, Mary Barra said, ”progress on key strategic initiatives has improved our visibility and strengthened confidence in our capacity to fund growth while also returning capital to shareholders.”

The company will pay the first quarterly dividend of 9 cents per share on September 15 to its shareholders of record as of August 31. The dividend, however, is 76% lesser than the 38 cents a share that General Motors paid before the suspension in 2020.

The Detroit-based carmaker also increased its share buyback program to $5 billion from the $3.3 billion remaining under the previous program.

Snap Summary

General Motors’ decision came as a relief to investors who had been eagerly waiting for the dividend to be reinstated, more so after rival Ford Motor (F) restored its quarterly dividend in October last year. Wall Street welcomed the positive news by sending GM shares 2.5% higher to $39.70 on Friday.

Paying dividends and buying back shares are the popular ways a company returns excess cash to its investors. Besides reassuring investors of management’s confidence in business, dividends and share buybacks are also a great way to reward loyal shareholders of a company.

Trading a little over six times its 2023 earnings estimates, GM shares are available at an attractive valuation. The stock is down about 32% so far this year. 

With a price target of $87, Citi expects the stock price to more than double as the brokerage reiterated its buy rating on General Motors. 

In addition to the investor day in November, analysts see many catalysts like the automaker’s plans to unveil its Equinox EV and host a cruise investor event in September to discuss autonomous cars, which may potentially boost the stock price in future.

Walmart’s second-quarter results beat market expectations

Big-box retailer Walmart (WMT) reported sales growth above 8% in its second-quarter earnings release, exceeding Wall Street’s expectations for revenue and income. The company posted quarterly revenue of $152.86 billion compared to $150.81 billion expected by analysts.

Considered a bellwether of U.S. consumer spending, Walmart’s earnings came as a huge respite for investors worried about inflation weighing down on American consumers. According to Chief Financial Officer John David Rainey, Walmart attracted more middle and high-income consumers during the quarter due to its big discounts.

However, the retailer reported consumers picking discounted groceries and essential items, putting pressure on its profits. Nevertheless, Walmart’s net income grew 20% from a year ago to $5.15 billion in the quarter ended July 31, 2022.

Excluding items, adjusted earnings of $1.77 a share came above market estimates of $1.62 per share.

Walmart saw same-store sales in the United States rise 6.5% during the second quarter, higher than the 5.9% growth estimated by analysts.

Snap Summary

Walmart shares climbed 5% after posting stronger than expected results. 

The top U.S. retailer now anticipates a smaller profit decline than its earlier prediction. For the fiscal year 2023, Walmart sees its adjusted earnings per share to reduce by 9% to 11%. Earlier in July, the retail giant had forecast an 11% to 13% drop in its earnings on the fears of shifting consumer behaviour.

Consumers are choosing groceries over other merchandise on which the company usually has higher profit margins. As a result, Walmart has been slashing prices of clothes and home furnishings to clear inventory, weighing down its profit margins.

However, the good news is customers still trust Walmart for its discounted offerings as more people flocked to its stores. Where Home Depot’s (HD) traffic fell 3%, Walmart’s customer traffic rose 1% during the three months.

While the retailer is likely to report weaker earnings this year, its strong market leader position will generate higher earnings in the long-term when inflation eases. Down about 5% year-to-date, this might just be the time to add this stock to your shopping cart before the earnings recover.

Cisco sees brighter days ahead

Cisco Systems (CSCO) gave a better-than-expected forecast for the fiscal year 2023 as it sees strong demand even during an uncertain macroeconomic environment. The company’s fiscal fourth quarter results also topped analysts’ estimates on topline and bottomline.

While analysts estimate current-quarter revenue to remain flat, Cisco anticipates it to grow in the range of 2% to 4%. The networking giant expects annual revenues to rise 4% to 6% on the back of easing supply chain constraints.

According to Chief Executive Officer Chuck Robbins, “After a challenging April due to the COVID-related shutdowns in Shanghai, overall supply constraints began to ease slightly at the back half of the fourth quarter and continuing into the start of Q1.”

At $13.10 billion, revenue remained flat during the quarter ended July 30, 2022, surpassing Wall Street’s expectations of $12.79 billion. Net income fell 6% to $2.82 billion as Cisco’s adjusted gross margin shrunk to 63.3% from 65.6% a year ago.

Nevertheless, adjusted earnings of $0.83 a share beat market expectations of $0.82 per share.

Snap Summary

The positive guidance indicates that networking equipment makers are moving past component shortage to make the most of the boom in digital infrastructure spending.

Signalling confidence and optimism, Cisco shares jumped 5.8% on the rosy outlook.

Even though Cisco shares are down nearly 23% this year, the stock is trading at 15.6 times its 2023 earnings estimates. The stock also pays a forward dividend yield of 3.08%. 

Therefore, a combination of low valuation and higher yield makes for a safe investment in a time when the broader tech sector is rattled by rising interest rates.

In addition, steady profits, consistent growth and $19.3 billion in cash, cash equivalents and investments are some factors supporting Cisco’s performance.