Wall Street Brunch: Megacaps Highlight Big Earnings Week

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Four of the Magnificent 7 headline a busy earnings week. (0:19) Investors get first look at Q1 GDP. (2:46) House passes $95 billion aid and security package. (4:29)

The following is an abridged transcript

The coming week will be dominated by earnings with four of the Magnificent 7 stocks reporting.

Tesla (NASDAQ:TSLA) will report on Tuesday, Meta Platforms (NASDAQ:META) weighs in on Wednesday and Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) are up on Thursday.

Deutsche Bank recently lowered its rating on Tesla, citing the delay in the launch of the Model 2. Meta (META) has seen strong sentiment since its 2023 “Year of Efficiency” strategy paid off. Truist said it will likely top forecasts. And UBS said that for Microsoft and Alphabet overall cloud infrastructure spending appears to be stable, but it was still not yet hearing anecdotes of any material cyclical cloud spending improvement.

The Magnificent 7, which also include Apple (AAPL), Nvidia (NVDA) and Amazon (AMZN), have been the drivers of this bull run. But there are signs that the AI trade is losing favor.

Last week the 7 lost a whopping $950 billion in market Nvidia saw the brunt of the selling, down more than 14% for the week and shedding nearly $300 billion. Chips as group fell 9% as ASML and TSM signaled slowdowns.

The S&P 500 has been down for three-straight weeks Nasdaq (COMP.IND)_ has been down six of the last seven. Goldman’s trading desk pointed to “geopolitical uncertainties, a higher for longer rates regime, and ongoing Q1 earnings.”

“Bond Proxies, Regional Banks, and Defensives outperformed on the week, while Bitcoin Sensitive Stocks, AI Enablers, and 12-Month Winners underperformed.”

But hedge funds seem to be sensing a good time to buy on the AI pullback.

Goldman notes that after three-straight weeks of net selling “hedge funds net bought global equities as overall gross trading activity increased for the 15^th straight week, driven by long buys outpacing short sales (~1.2 to 1).”

Hedge funds “bought US Info Tech stocks for the 3^rd straight week and at the fastest pace in 2 months, primarily driven by long buying in mega-cap names. While Software was by far the most notionally net bought subsector” but its long/short ratio is still at 5-year lows.

Apart from the Mag 7, there are plenty of other big-name earnings.

Monday brings Verizon (VZ), Truist (TFC) and Albertsons (ACI). On Tuesday Visa (V), Pepsi (PEP), Texas Instruments (TXN), Philip Morris (PM), UPS (UPS), Lockheed Martin (LMT) and GM (GM). IBM (IBM), AT&T (T), Boeing (BA), Chipotle (CMG) and Ford (F) report on Wednesday. On Thursday there’s Merck (MRK), Caterpillar (CAT), Comcast (CMCSA), Altria (MO) and Intel (INTC). Exxon Mobil (XOM), Chevron (CVX) and Colgate-Palmolive (CL) headline Friday.

On the economic calendar

The first measure of Q1 GDP is due on Thursday. The consensus is for GDP to rise at a 2.4% annual rate.

Pantheon Macro economist Ian Shepherdson is looking for an above-consensus print, saying once again “households likely did the heavy lifting. We estimate that real personal consumption expenditure rose by 3.3%, the fastest pace for four quarters. In real terms, spending on services likely powered ahead with a gain of about 4½%, while goods spending probably edged up by only around ½%.”

On Friday March personal income and spending figures arrive. That’s accompanied by the Fed’s favorite inflation gauge, the core PCE price index. Economists expect that the index rose 0.3% last month, with the annual rate edging down to 2.7% from 2.8%.

UBS chief economist Paul Donovan noted that Fed Chairman Jay Powell “stated reaching 2% inflation was taking longer than expected.”

“The US PCE deflator is 2.5% y/y, the core PCE deflator is 2.8% y/y, and harmonized inflation is 2.4% y/y. Imprecise data means most economists regard a 2% inflation target as meaning a 1%-to-3% range. The fictional owners’ equivalent rent may be taking longer than expected to reach 2%, but that is not the same thing as inflation.”

“Powell has never articulated a medium-term policy framework beyond ‘data dependency,’ Donovan said. “Keeping interest rates higher for longer will do nothing to reduce owners’ equivalent rent (it might increase it). Higher for longer might make durable goods deflation worse. There is a risk that Powell might be more concerned with political presentation than good economics.”

Right now the market is pricing in a first rate cut in September, but it’s split 50/50 on whether a second one will come in December.

In the news this weekend

The U.S. House of Representatives passed a $95 billion legislative package that, if ultimately approved, would provide security aid to allies Ukraine, Israel and Taiwan, and possibly enforce a ban of popular short-form video platform TikTok.

The legislation is unusual in that it consists of four bills, three of which deal with aid and the other with national security. The passing of the security aid measures saw broad bipartisan support, despite hardline Republicans having voiced vehement objections.

The package will now head to the U.S. Senate, which is expected to pass the measure next week. President Joe Biden urged the Senate to “quickly” send the package to his desk so that it could be signed into law.

Wells Fargo’s economics teams says that Iran’s missile attack on Israel was escalation since it did not go through a proxy, but it was also more “symbolic and a face-saving technique rather than an explicit attempt to inflict maximum damage on Israel.”

“Israel’s retaliatory strike on Thursday night was also rather limited, and in our view, more of a warning strike on Iran as well,” they said.

We “continue to believe military conflict will remain contained and not expand into Tehran or the broader Middle East. Under the assumption that conflict in the Middle East does not escalate, we do not anticipate any disruptions to global economic activity, the shift to more accommodative monetary policy from major central banks or our view that the U.S. dollar (DXY) will enter a period of trend depreciation starting from late 2024.”

For income investors

Dell (DELL) and Stellantis (STLA) go ex-dividend on Monday. Lowe’s (LOW) goes ex-dividend on Tuesday. And Costco (COST) goes ex-dividend on Thursday.

And in the Wall Street Research Corner

J.P. Morgan updated its U.S. Analyst Focus List, a selection of stocks, chosen by analysts and targeted for growth, income, value and short ideas investment strategies.

Additions to the list this month include TFI International (TFII), PVH (PVH), HealthEquity (HQY), CarMax (KMX) and Bank of America (BAC).

Fortive (FTV) was removed.

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