When assessing the recent price activity and the swings in the stock market, two questions consistently come to mind: One being, has all of the bad news been sufficiently priced in, and second, have we reached a bottom? As the Fed works to battle rising inflation with rate hikes over the past couple of months, there have been a few occasions when it seems both questions were answered, but only to find out they were head-fakes. But it is different this time?
Stocks ended the week Friday on a strong note, following trading activity this past week that displayed an aggressive return to not only to risk assets, in general, but also to the high-growth stock, especially the names that were punished during the correction. The Dow Jones Industrial Average rose sharply Friday, rising 377.19 points, or 1.19%, to end Friday’s session at 32,151.71. Among the Dow’s notable gainers were Apple (AAPL), Salesforce (CRM), Microsoft (MSFT) and Walt Disney (DIS).
The S&P 500 rose 61.18 points, or 1.53%, finishing at 4,067.36, with all eleven S&P sectors closing out higher. Communication Services lead the way with a rise of 2.5%, while Energy jumped about 2.4%. Tech-heavy Nasdaq Composite also surged higher by 250.18 points, or 2.11%, to close at 12,112.31. Aside from the aforementioned Apple and Microsoft, the Nasdaq was powered by, among others, 4.37% rise in shares of Meta Platforms (META) and an 3.6% gain in Tesla (TSLA).
With the strong gains Friday, all three major averages ended the week higher, snapping a three-week losing streak. For the week, the S&P 500 index was the largest gainer, rising 3.7%, followed by the Nasdaq which gained 3.1%, while the Dow ended 2.7% higher. Reason for the sudden increased confidence in stocks? It appears that investors have come to terms with the hawkish tone the Fed has adopted to battle inflation. The market is pricing in an 90% chance of rate increase of 75 basis points, leaving a 10% possibility of the increase being only 50 basis points.
What the Fed decides may ultimately be determined by inflation-related data that is due to come out next week. With the earnings season all but a distant memory, there are few catalysts to drive stocks higher other than overall investor sentiment. Assuming a soft CPI number is delivered, it’s highly likely that any rate increase is at least 50 basis points. How the market will react from that decision remains to be seen. But it’s hard to fathom that the worst is not already behind us.
On the earnings front, here are the names to keep an eye on for this coming week.
Oracle (ORCL) – Reports after the close, Monday, Sep. 12
Wall Street expects Oracle to earn $1.08 per share on revenue of $11.45 billion. This compares to the year-ago quarter when earnings came to $1.03 per share on revenue of $9.73 billion.
What to watch: With Oracle stock falling 14% year to date and 17% over the past year, the risk-versus-reward has become favorable, according to John DiFucci analyst at Guggenheim who initiated his coverage on Oracle with a Buy rating and a $107 price target. Currently trading at around $76 per share, that price target calls for close to 40% upside. The company could experience “years of hypergrowth by migrating existing Oracle on-premise mission-critical workloads,” noted DiFucci. To justify the price target, the analyst also added that any further penetration Oracle experiences in a broader market would be seen as “an added benefit.” Part of the thesis has to do with the fact that the global cloud computing market size is forecasted to grow some 16% in the next four year, rising from $445 billion in 2021 to $947.3 billion by 2026. Although Amazon’s (AMZN) AWS and Microsoft’s (MSFT) Azure are dominant cloud players, Oracle is poised to capture market share as the enterprise digital transformation continues. Currently seen as a transformation play based on its business transition towards a cloud subscription-based model, Oracle on Monday must demonstrate how it can become a future global cloud leader.
Adobe (ADBE) – Reports after the close, Thursday, Sep. 15
Wall Street expects Adobe to earn $3.35 per share on revenue of $4.44 billion. This compares to the year-ago quarter when earnings came to $3.11 per share on revenue of $3.94 billion.
What to watch: Adobe stock has declined 32% year to date and 42% over the past 12 months, compared to the 16% year to date decline in the S&P 500 index, which has fallen just 11% in 12 months. Adobe shares have been punished amid the recent correction in technology stocks. This is despite the company benefiting from the massive secular digitization trend that is poised to remain hot over the next two years. Meanwhile, the company has executed impressively, producing strong earnings for the second quarter, including record revenue of $4.39 billion, which beat analyst expectations by nearly $40 million. The company continues to benefit from strong new user adoption and subscription revenue. However, despite the solid quarter, the forward guidance for Q2 which was lowered was a disappointment. The company expects Q2 revenue of $17.65 billion, which is lower than the $17.85 billion analysts forecasted. The management is being cautious due to slower digital marketing spending, which could limit revenue. But the stock is cheap, following the near 50% pullback from all-time highs. Plus, Adobe’s free cash flow yield is now close to 4.5% near a five-year high. Now’s the time bet on a recovery.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.